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Argelia Long
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Not long ago, Netflix (NFLX -0.93%) had investors very worried. Revenue and membership growth decelerated rapidly in 2022 and eventually hit low-single-digit levels. Also weighed down by a sell-off in tech stocks, the stock cratered, falling more than 50% in 2022. However, as Netflix started rolling out its advertising business and began cracking down on users who accessed the service without paying by logging into someone else's account, the narrative quickly turned positive. Shares have risen more than 80% since the beginning of 2023, and the stock is up 50% over the trailing 12 months.
With such incredible gains in the rearview mirror, some shareholders may be debating what to do. Is it time to sell and take profits, or is the stock's big move higher evidence of a much stronger long-term investment thesis?
It's not surprising that Netflix's stock has risen sharply recently. The company's financials are improving on almost every key metric. The company reported fourth-quarter results on Tuesday. Its year-over-year revenue growth rate went from 1.9% in the fourth quarter of 2022 to 12.5% in the fourth quarter of 2023. Over this same time frame, earnings per share increased from $0.12 to $2.11, paid memberships rose from 231 million to 260 million, and quarterly free cash flow soared from $332 million to nearly $1.6 billion. Not to mention Netflix's total diluted share count decreased from about 451.6 million to 444.3 million during this period thanks to a well-timed share repurchase program.
"Our healthy top line growth reflects the benefits of paid sharing, our recent price changes and the strength of our underlying business driven by a strong slate," management said in the company's fourth-quarter shareholder letter.
What's more, Netflix said last week that it anticipates even faster revenue growth and a whopping 56% year-over-year increase in earnings per share in the current quarter -- a growth rate that would put Netflix's first-quarter earnings per share at $4.49. This huge increase in earnings is expected to come from further operating margin expansion.
Looking even further out, Netflix's fast-growing but still small advertising business should start having a material impact on the company's business by next year. Though Netflix's ad business is still small, investors shouldn't underestimate its long-term potential impact on the company and the stock. Management said 40% of new membership sign-ups in markets where Netflix offers ad-supported memberships opt for this new tier. Further, this new segment's growth has been astounding, growing 70% quarter over quarter in Q4 -- and that's on top of 70% quarter-over-quarter growth in the prior period.
Considering Netflix's impressive business momentum, the stock's recent surge higher seems to be justified. Sure, shares may look expensive at first glance given the stock's current price-to-earnings ratio (P/E) of 45. But strong top-line momentum and an expanding operating margin could lead the company's earnings per share to soar in 2024. This would quickly bring down the stock's P/E to a more attractive level. Analysts certainly expect robust earnings growth. That's why Netflix stock's forward price-to-earnings ratio is just 32.5.
Trading at just 32.5 times analysts' consensus forecast for Netflix's 2024 earnings per share, the stock looks like a hold today. A handful of powerful tailwinds could drive robust growth for the company for years. Further, Netflix's dominant business offers investors a powerful stream of recurring and reliable subscription-based revenue, making a strong case for the stock to trade at a high valuation multiple. Continued membership growth, more membership price increases, and a fast-growing advertising business arguably justify the stock's current valuation.
Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
Experts are generally positive about Netflix, Inc. (NFLX-Q), with many citing its leading position in the streaming service industry, strong revenue growth, and successful initiatives such as the password crackdown and ad-supported tier. Some concerns about valuation and potential competition are also mentioned, but overall, the company's profitability, content quality, and potential for international growth are noted as key strengths.
Doesn't know if the company's going to beat on earnings today. Problem is that even if it beats, it may not beat by enough, or the guidance won't be good enough, and the stock will fall. In hindsight, you'll look at the chart and say "of course" the stock fell, it had already done so well. Too hard to predict.
Loves it long term. Part of his thesis is to own companies that will dominate the space for the long term, whether via the best assets, management or strategy. NFLX is eating market share from competitors.
Probably the leader in streaming. Content continues to attract subscribers. First to launch ad-supported version, going well. Good run. Difficult to anticipate price movement on quarterly earnings. Valuation too high for her. To add, wait for a general market pullback.
It reports next week. You can't buy it now because there's so much momentum. Buy it when expectations exceed results. Management doesn't care about quarterly performance, but the long term. Has seen several upgrades recently. Peers have raised rates, so Netflix is actually cheaper now. He may add shares even if they miss earnings.
Winning the streaming space with all its global subscribers. New high in projected revenues forecast for fiscal 2024. Continues to dominate subscription streaming service industry. Focus on sports and original content has allowed it to differentiate itself, building a loyal global customer base. No dividend.
Expanding footprint into EMs, significant source of more subscribers. Advertising-supported subscriptions will attract the budget-conscious, and gain ad revenue. Since 2022, clear uptrend channel of higher highs and lows. Looks as though it's about to break out above its late-2021 highs, which is significant. If it does, then the sky's the limit.
Sees 30+% EPS growth. PEG ratio is only around 1, fairly inexpensive compared to other communications names.
He just bought not too long ago. There was a base in Dec-Jan. Spiked up, breakout late January. Often you tell yourself you'll wait for it to come back before you get on the train. You should just get in and buy half a position. It could shoot up and you never get your chance. But this way, at least you got in there.
This one came back down in April to the underside of the January breakout, and then away it went. Now need to see it get through previous peak of 2021, around $700. It's close now. New initiatives will accelerate a second phase of growth.
Has been buying shares. Current share price presenting value for long term investors. Clear leader in streaming. Investing in original content. Driver for higher earnings will be tighter password requirements (can't share with family). Subscriber numbers continue to increase. Expecting further stock price appreciation going forward. Expanding into other markets outside of USA. Good combination of growth and safety.
Last Friday, shares sank 9% after they reported. Their Q1 looked good to him, though, with a huge subscriber beat (adding 9.33 million paid users) and revenue jumped 15% YOY. $2.14 billion cash flow was impressive, and the company offered great guidance for the next quarter. That said, the full-year revenue growth forecast seemed lacking, slightly below expectations, and management didn't raise its full-year free cash flow forecast. This suggests things will be worse in the second half of 2024. Also, they're getting hit by currency fluctuations, like the collapse of Argentina's peso. But starting next year, Netflix won't supply numbers about membership and average revenue per member, which really spooked the market and triggered the sell-off. He agrees that they revenues mean more now with the company, but it was a boneheaded move to hide this data. Overall, he's more bullish than bearish about Netflix. Memberships are up and their ad business is growing.
Good company, but is it a good stock? Moved sharply higher on the back of success. Declared winner of the streaming wars. Watch profitability and margins in the NA markets, as that's where it makes money. Priced aggressively. On valuation, he'd need 20-30% drop before being interested.
In the last year, 27 stock analysts published opinions about NFLX-Q. 19 analysts recommended to BUY the stock. 4 analysts recommended to SELL the stock. The latest stock analyst recommendation is . Read the latest stock experts' ratings for Netflix Inc..
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