With a year-to-date gain of around 40%, Netflix (NFLX) is outperforming the S&P 500 Index ($SPX) by a wide margin this year. However, the momentum looks somewhat stalled, and the stock is up by just about 2% over the last month, barely in line with the average S&P 500 Index constituent.

As I noted in a previous article, as trade tensions subside and macroeconomic fears recede, investors may shift from Netflix – which was viewed as a bastion of safety and a defensive play – into other tech names that are more cyclical and were beaten down amid the market downturn.

We are now in Q2 earnings season, and Netflix will report its earnings on July 17. In this article, we’ll examine the company’s earnings estimates and assess whether the confessional will help revive investor sentiment.

Netflix Q2 Earnings Estimates

Analysts expect Netflix to report revenue of $11.04 billion in the June quarter, a year-over-year rise of 15.5%. The estimates are in line with the company’s guidance, even as KeyBanc, which recently raised NFLX’s target price from $1,070 to $1,390, expects the number at $11.2 billion. The brokerage expects Netflix to report earnings per share of $7.20, slightly ahead of the company’s guidance of $7.03 and consensus estimate of $7.05.

NFLX Stock Forecast

KeyBanc is not the only brokerage that has raised Netflix’s target price heading into the Q2 confessional. Goldman Sachs, Barclays, and Canaccord Genuity have also done so this month, with Canaccord raising its estimate to $1,575, which is close to the Street-high target price of $1,600.

That said, a section of the market has been getting apprehensive about Netflix, and Seaport Global recently downgraded the stock to a “Hold.” Previously, in May, JPMorgan had also downgraded Netflix stock. The common theme in both of these downgrades is Netflix’s valuations and its seemingly unattractive risk-reward in the short term. 

These concerns are not unfounded as with a forward price-earnings (P/E) multiple of 50.9x, Netflix trades at a significant premium to the market as well as its own historical averages. For context, the stock’s forward P/E has averaged in the 30x range over the last 1-year, 3-year, and 5-year periods.

Netflix Is the Leading Streaming Player

I would argue that Netflix has earned the right to command premium valuations due to its strong execution. At a time when the streaming industry was trying to balance growth with profitability (or rather losses for most companies), Netflix delivered both subscriber growth and profits.

Netflix has built a strong moat with its impressive and ever-expanding library of global content and is nearly irreplaceable for most users. While previously Netflix was seen as a cyclical play on fears that users would cancel their subscription in periods of economic turmoil, the company has managed to shed that impression. Most users are hooked to Netflix, and even if they slash discretionary spending, I believe most would downgrade to the ad-supported plan instead of canceling their Netflix subscription altogether.  

Netflix is now gearing up for its next stage of growth and is betting on the digital advertisement business, live sports streaming, and video games. Netflix has just about scratched the surface when it comes to digital advertising, and the business will ramp up considerably in the coming years, adding to the company’s top line as well as the bottom line. 

Is Netflix Stock Overvalued?

Netflix has seen a structural valuation re-rating and trades at a significant premium to the average tech name, as well as entertainment plays like Disney (DIS). However, I am still not too convinced that the stock is a buy at these valuations.

With Netflix set to release its Q2 earnings next week, I would watch out for commentary on guidance as well as any color on the advertisement business. While the company might still beat earnings, I don’t expect any major post-earnings upside as the stock is priced for perfection. Overall, I won’t add any more NFLX shares heading into the confessional, even as I continue to hold my existing positions, which I don’t intend to sell unless the valuations get really frothy.