THE 3 REASONS NFLX IS GOING REPORT BLOWOUT NUMBERS

Posted By admin on Apr 16, 2011 | 2 comments

This article featured on TheStreet.com, Fidelity, and MSN Money.

A couple months back I wrote an article that said NFLX would outperform AAPL during any market correction. What I should have wrote, at the time, was that NFLX would outperform AAPL period.

The point of the article was missed by most. I take full responsibility as I probably mixed in too many distracting points and topics. It's not about an AAPL versus NFLX war of technology, executives or each companies place within this technology driven world.

The point of the article was that market psychology drives stock price, irrespective of fundamentals. When a momentum driven trend begins in a company that is under a tremendous amount of scrutiny and doubt, it creates a support dynamic for the stock. It allows the stock to continue to a share price and market cap that not even the founders of the company could have imagined would be possible.

NFLX is a prime example of this dynamic at work. I wrote about it in detail months ago. It's such a difficult concept for even seasoned investors to understand. It's a prime example of how the rational mind has no place in speculation. AAPL is simply a popular stock that provides an excellent benchmark to illustrate the power of this dynamic.

The rational mind will be challenged once again when NFLX releases earnings on April 25th. It will be a blowout number that sends the stock price to new highs and will only serve to draw more ire and criticism towards the stock, creating a further support dynamic that the bears will refuse to understand.

I base my guess of a blowout earnings number on the following:

1. Price action: momentum driven names that are plagued by skepticism have a tendency to rise into a positive earnings report. It is rare that they will reward a large group of bears by closing near all-time highs and then plunging 20 or 30 percent on an earnings debacle. It happens, but the incidences are rare.

2. Company life-cycle: when we look back on NFLX ten years from now, whether the company is a leader in entertainment technology or a bankrupt penny stock, we will view this period of time as the point where NFLX took on big media/entertainment companies and won. Alternatively, it can also turn into the point where big media took a stand and turned the company into the next Blockbuster.

NFLX management is well aware of the importance of this point and time in the companies life-cycle. A less than enthusiastic assessment of future earnings and the resulting plunge in the price of the stock, would be the equivalent of attempting to take on a stampeding band of well-trained soldiers with a bb-gun and a slingshot.

You can be sure that NFLX management will be as enthusiastic as possible about their future earnings estimates. Not to mention upcoming projects and advancements.

3. Seasonality: Q1 has historically been a strong quarter for NFLX. As every Blockbuster and Hollywood Video within driving distance closes, more individuals have no choice but to rely on movies by mail or direct streaming. The first few months of the year are the coldest, causing a spike in home entertainment activities. NFLX will be a direct beneficiary of both a lack of competition and increased demand in Q1.

Depending on what NFLX stock does this week, I will be putting on a trade to take advantage of what I see as a high percentage chance of pop in the stock price following earnings. A premature breakout to new highs or excessive weakness are both scenarios that will cause me to rethink taking the trade. I will post a "Trade Update" should a position be taken.