Netflix, Inc. Earnings: Where Momentum Really Matters

On Monday, Netflix (NFLX -0.51%) will release its quarterly report, and investors have recently punished the stock along with a host of other stocks that were favorites among those following momentum-driven strategies. Yet even though its share price has risen and fallen sharply on several occasions in recent years, Netflix really needs to sustain the upward momentum in its revenue and earnings, on which shareholders are counting in order to justify the stock's premium valuation amid competition from Amazon.com (AMZN -1.14%).

The story of Netflix has been one of the most tumultuous in the stock market recently, as the streaming video service provider has seen its shares rise and fall only to rise again to even greater heights. Over the years, though, the landscape for the streaming industry has changed, forcing Netflix to pursue efforts to streamline its service delivery and fend off competition. With the costs involved in reaching agreements with Comcast (CMCSA 1.62%) and potentially other broadband providers in the future, though, can Netflix keep its earnings growth accelerating? Let's take an early look at what's been happening with Netflix over the past quarter and what we're likely to see in its report.

Source: Netflix.

Stats on Netflix

Source: Yahoo! Finance.

Can Netflix earnings keep climbing this quarter?
In recent months, analysts have had more favorable views on Netflix earnings, boosting their first-quarter estimates by a nickel per share and their full-year projections for 2014 and 2015 by 2% and 5%, respectively. The stock has made another big rise and fall over the past several months, but is now right back where it was in mid-January.

Netflix's fourth-quarter earnings report got the stock moving in the right direction early this quarter. Netflix wooed 2.3 million new members in the U.S. and an additional 1.7 million internationally, helping the company crush earnings estimates by about 20%. Even more encouraging to shareholders were hints that Netflix could amend its pricing plan structure at some point in the near future as it continues to try to separate its legacy DVD business from its streaming business, which it sees as its key driver for future growth. A successful marketing campaign was largely responsible for growth in subscriber counts, and Netflix might need to make similar efforts to drive more members to the service as penetration rates increase.

But after huge gains to begin the year, Netflix stock has plunged over the past six weeks, giving up a quarter of its value. Although the entire stock market has seen high-momentum stocks punished severely, Netflix specifically faces some upcoming obstacles that could be dampening shareholder enthusiasm about the stock. For instance, the current second quarter tends to be slow for Netflix, as U.S. and European subscribers see weather improve and spend less time watching video content. In addition, Netflix has to walk a fine line between maximizing short-term profit and spending enough on subscriber acquisition and retention to sustain its longer-term growth and fight off competitive pressure from Amazon. The way that those figures whipsaw in both directions largely explains the volatile moves in share price at certain points.

Netflix has found itself at the center of the net neutrality debate, as the streaming video business is one of the most bandwidth-intensive applications that most people ever use. In order to compensate Internet service providers, Netflix has entered into deals with Comcast and others to get preferential quality in exchange for payments. The big question for investors is whether Netflix will pass through those costs in the form of higher subscription rates -- which could hurt subscriber growth -- or suffer a resulting drop in profit margins. Still, in Europe, net neutrality appears to be moving in a different direction, and Netflix might be able to avoid the issue in its key international markets.

Also, Netflix has gotten mentioned as a possible takeover target, especially as major tech companies look into content delivery businesses of their own. Yet Netflix's valuations are already so high that such a purchase would be prohibitively expensive even for cash-rich tech giants, and so much of the value of Netflix comes from its independent spirit that subsuming it into a large entity could destroy customers' perception of the brand.

In the Netflix earnings report, watch to see how the company's numbers compare domestically and internationally. Netflix needs to establish a quick pace of growth, but as long as it can sustain that pace, shares have the potential to rise.

Click here to add Netflix to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.