Why Netflix (NFLX) is Up and 3 Stay-at-Home Stocks That Can Follow Suit

Published in

DataDrivenInvestor

6 min readJan 21, 2021

How to Use Netflix Earnings to Guide Your Next Trade

Netflix stock (NASDAQ: NFLX) surged 17% on Wednesday to reach all-time highs despite a miss on their Q4 2020 earnings. We’ll examine why Netflix stock is up and how a potential sector rotation could help 3 stay-at-home stocks achieve similar results.

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The Earnings Dichotomy

Netflix announced Q4 2020 earnings of $6.64 billion in revenue, narrowly beating estimates by 0.3%, while EPS was completely missed at $1.19 (a miss of 13.8%).

                          Expected      Actual        ResultQ4'2020
   Revenue                 $6.62B       $6.64B      BEAT by 0.3%
   Earnings Per Share      $1.38        $1.19       MISS by 13.8%Q3'2020
   Revenue                 $6.38B       $6.64B      BEAT by 4.1%
   Earnings Per Share      $2.13        $1.74       MISS by 18.3%Q2'2020
   Revenue                 $6.05B       $6.15B      BEAT by 2.1%
   Earnings Per Share      $1.81        $1.59       MISS by 12.2%

Comparing the earnings reports for 2020, they all have similar characteristics (revenue beat, earnings miss) yet investors have reacted positively to the Q4 report unlike they did in Q2 and Q3. The divergence in price action is caused by the positive outlook for Netflix that investors did not have in previous quarters.

To set the context, Netflix has been a major beneficiary of the pandemic as people stayed at home and transferred their discretionary income away from traditional food, travel, and entertainment industries, and into companies providing goods and services for people in the home (streaming, work from home, exercise, home improvement, etc.). As a result, Netflix and many of these “stay-at-home” stocks enjoyed massive runups in price from the start of the pandemic and throughout 2020. However, there are questions about the stock price given the vaccine on the horizon and the economy eventually going back to its normal behavior.

In the case of Netflix, the company enjoyed massive gains in subscribers in the early part of 2020 as streaming was the go-to source of entertainment in the home. However, many believed that the growth numbers were “pulled forward” from future quarters. In other words, the thought was that Netflix wasn’t really growing its revenue and subscriber base but merely moving signups from future quarters to make their current growth rates unsustainable. That concern was definitely felt in Q3 where Netflix only grew by 2.2 million subscribers versus the growth of 7 to 10 million subscribers it achieved in previous quarters. The stock price ran up to all-time highs before tanking on both Q2 and Q3 earnings announcements as investors questioned the future outlook for the company.

Q4 and Beyond

For Q4, Netflix reported a growth of 8.5 million subscribers, handily beating analysts’ estimates of 6.0 million. With $NFLX popping back to all-time highs, the real question is if their growth and future outlook can be maintained. Here are some reasons why $NFLX can retain their current price and potentially move further to the upside.

Quarterly Outlook — The Q4 subscriber number debunked the idea that growth was being “pulled forward” (at least temporarily). With Q4 results on the books, Netflix investors can enjoy a positive outlook on the stock at least until the next earnings announcement.
Slow Vaccine Rollout — During the Q3 earnings season, it was thought that the vaccine was around the corner, causing many investors to pull out of stay-at-home stocks. Fast forward three months later, and while we do have a vaccine, the rollout has been slow with no major changes to the rollout process. Many expect to be in this pandemic state for at least the next 2–3 quarters.
Stay-at-Home Becomes the Norm — Even with the end of the pandemic, many of the stay-at-home behaviors will become the new norm. Would people fly to meet a potential client in person, or prefer to video conference as a faster and cheaper alternative? Are just as many people going to watch the latest movie in the theathers, or prefer to stream it in the comforts of their home (think Soul on Disney+ and Wonder Woman on HBO Max). Our behaviors have fundamentally changed as a result of the pandemic and many of the stay-at-home companies will remain strong for the foreseeable future.

The Netflix Effect

Throughout the pandemic, Netflix has been the “canary in the coal mine” as it is the first stay-at-home stock to report earnings in each quarter. Here are 3 stay-at-home stocks that have experienced similar outlook concerns, yet have the potential for a similar trend reversal that $NFLX is experiencing.

DocuSign docu price chart — DOCU Price Levels

DocuSign (NASDAQ: DOCU)

DocuSign had an amazing Q3 with a revenue beat of 6% and an EPS beat of 69%. While there was an initial pop after the announcement, prices went lower and trended sideways due to outlook concerns. Look for an entry around the $240 levels in anticipation of Q4 results scheduled for March 11th.

                         Expected      Actual         ResultQ3'2020
   Revenue                 $361M        $383M       BEAT by   6%
   Earnings Per Share      $0.13        $0.22       BEAT by  69%Q2'2020
   Revenue                 $319M         $342M      BEAT by 0.3%
   Earnings Per Share     -$0.21         $0.17      BEAT by  81%

zoom zm stock price chart — ZM Price Levels

Zoom (NASDAQ: ZM)

Zoom had a massive Q3 earnings beat with revenue surpassing estimates by 12% and EPS by 21%. Despite the beat, the stock was hammered from all-time highs based on the slow down of their revenue and EPS growth rates. Look for an entry around the $365 as it approaches pre-Q2 levels. Earnings will be announced on March 3rd.

                          Expected      Actual         ResultQ3'2020
   Revenue                 $694M        $777M       BEAT by  12%
   Earnings Per Share      $0.76        $0.92       BEAT by  21%Q2'2020
   Revenue                 $500M        $664M       BEAT by  33%
   Earnings Per Share      $0.45        $0.92       BEAT by 104%

salesforce crm stock price chart — CRM Price Levels

Salesforce (NYSE: CRM)

Salesforce beat Q3 earnings estimates by 3% on revenue and 132% on EPS. The stock price was negatively affected by their purchase of Slack Technologies for $28 billion as well as the outlook from their pandemic run up. Look for an entry at the $215 levels in anticipation of Q4 results scheduled for February 23rd.

Q3'2020
   Revenue                 $5.25B       $5.42B      BEAT by   3%
   Earnings Per Share      $0.75        $1.74       BEAT by 132%Q2'2020
   Revenue                 $4.90B       $5.15B      BEAT by   5%
   Earnings Per Share      $0.67        $1.44       BEAT by 115%

Portfolio Summary as of 1/21/2021

$NFLX

Earnings popped prices up to all-time highs at $590 before settling down to $570s as sellers are looking to profit. Added Netflix into the portfolio at $571 as this level was the previous highs from October and can potentially act as support for the next run up.