Should You Buy Netflix Stock Before Its Earnings Report After Hours Today?

Netflix (NASDAQ:NFLX) has successfully disrupted the entertainment industry, but lately it looks like it's the one getting left behind.

The stock is down 26% year-to-date, even as the broad market has risen, and Netflix lost out on its planned acquisition of Warner Bros Discovery after it was outbid by Paramount Skydance, which is now Skydance.

Investors are worried about weak engagement trends as it's struggling to grow viewing hours, and its slate of original content this year has fallen flat. The company is losing market share to its rivals, especially YouTube, which has increased its lead over Netflix this year. According to Nielsen, Netflix's share of TV viewing in the U.S. fell from 8.8% to 7.8% over the year ending in July.

Management has pushed back on the weak engagement narrative, saying that not all engagement is created equal, and that it's chosen to invest in areas like live sports that pack the same punch per dollar in engagement, but attract new subscribers.

Netflix's problems became more evident last week when it said it would lay off 6% of its staff and let go of Chief Content Officer Bela Bajaria, bringing in Peter Rice in her place. Rice is a veteran of Disney and 21st Century Fox and has a track record of developing popular shows and films, including Modern Family, The Bear, and Slumdog Millionaire.

So with Netflix hovering at a two-year low ahead of its earnings report, is it a buy? Let's take a look at what to expect.

Image source: Netflix.

What the numbers say

Netflix's revenue growth rate has been slowing in recent quarters, and that trend is expected to continue in the third quarter. In fact, it's expected to report its slowest growth in the last three years, as Netflix's guidance calls for revenue to grow 11.7% to $12.86 billion. On the bottom line, it sees earnings per share growing from $0.59 to $0.82.

That's still solid growth, but investors are more concerned with the trendline in light of its weak engagement growth. Investors will be paying close attention to its fourth-quarter results, as historically, the company sees its strongest growth in the winter months.

Why things could get worse before they get better

Netflix has course-corrected several times in the past, and it seems due for another. The company needs to reset the narrative around its engagement and original programming, and it's likely to take more than a quarter to do that, especially with the departure of Bajaria. That signals a new direction for its content, which seems needed, but it will take time to show results.

However, Netflix has advantages that will last beyond its current struggles with original programming and engagement. No other competitor can match its subscriber base around the world, and that gives Netflix the scale to invest in programming that its competitors can't match and a global reach, as most of its revenue comes from outside of the U.S., even though its performance in the U.S. gets outsize attention.

Even as some analysts see a rising threat from Skydance, and Disney is finally delivering profits, Netflix is still the best-positioned in streaming. Eventually, it will have to get back to delivering quality content, but for long-term investors, the current sell-off looks like a buying opportunity.

I think Netflix is more likely to fall than gain on today's earnings report, but the current valuation looks attractive if you believe they will overcome the current challenge, and they have done that with every one in the past.

Jeremy Bowman has positions in Netflix. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.