Netflix Earnings: Subscriber numbers feed into relief rally, but how far can it stretch?

• NFLX stock rallies lucky 13% after announcing earnings on Tuesday.
• Netflix subscriber growth helps shares stage a relief rally.
• NFLX will look to the bottom as investors hope this is the end.

Netflix (NFLX) came out with earnings after the close on Tuesday, and the horror show of previous earnings has been put behind them. The company's new advertising-supported tier is one hope for future subscriber growth, and the stock reacted well with it soaring over 14% higher at one stage in the afterhours market.

Netflix stock news

Earnings per share (EPS) came in at $3.10, which was well ahead of the consensus of $2.17. Revenue also beat estimates, $7.93 billion versus $7.84 billion. It was mainly the subscriber numbers though that cheered investors. Netflix was expected to add 1 million new subscribers for the quarter but blew that prediction out of the water when announcing 2.4 million new additions. The stock immediately surged higher and held most of those gains on Wednesday.

Revenue was affected by FX headwinds, an issue for most US companies now. Netflix said it was confident it could adjust its pricing to reflect the strong dollar. Netflix also said it will not provide guidance in the future for paid memberships. It appears this is due to the company's focus on revenue as its key metric since advertising enters its mix.

"Thank God we're done with shrinking quarters," Co-CEO Reed Hastings said. "It's a big deal to go back to the positivity...We still got FX. So that's a huge hit, as we've explained. So that's not going to go away, but other than that all the stars are lining up very well for us."

Netflix stock forecast

Our preview note from Monday was prophetic: "Netflix has been trying to bottom and has traded in a sideways range since August, so earnings could provide the catalyst for a breakout. As mentioned I believe the risk-reward lies in an upside surprise. Netflix has suffered this year already, and a lot of bad news can be assumed to already be in the price. Technically, a break higher would target $333, the earnings gap from April. There is a natural volume gap as a result."

If only I had put my money where my mouth was! That same technical setup remains in play. The earnings gap from April remains the target now on this aggressive move higher at $333. To keep the trend intact, Netflix can retrace and stabilize before charging up for a move higher, but it must hold the breakout support level at $252.

NFLX 20-hour chart