After Earnings, Is Netflix Stock a Buy, a Sell, or Fairly Valued?

•

Fair
Value
Estimate:
$500.00
•

Morningstar
Rating:
★★
•

Morningstar
Economic
Moat
Rating:
Narrow
•

Morningstar
Uncertainty
Rating:
High

What
We
Thought
of
Netflix’s
Q2
Earnings

Netflix’s
revenue
growth
accelerated,
and
another
8
million
subscriber
additions
mean
this
metric
has
hardly
slowed,
even
as
the
company
is
over
a
year
into
some
of
its
recent
catalysts
–
namely,
the
crackdown
on
password
sharing
and
offering
lower-priced
ad-supported
subscriptions.

The
operating
margin
remained
toward
the
high
20s,
a
huge
step
up
from
any
time
before
2024,
and
this
should
represent
a
new
normal.
Netflix
is
very
profitable.

There
are
still
catalysts
ahead
to
keep
revenue
growth
high
in
the
near
term.
The
crackdown
on
password
sharing
isn’t
yet
universal,
and
the
company
isn’t
monetising
its
ad-supported
subscribers
well.
It
hasn’t
built
out
and
perfected
its
advertising
engine,
which
should
occur
over
the
next
few
years.

Netflix’s
valuation
looks
a
bit
high.
We
think
one
must
assume
that
recent
growth
rates
persist
for
several
years.
The
firm’s
business
is
phenomenal,
but
we
expect
a
slowing
and
believe
the
past
year
has
been
abnormally
great
rather
than
a
new
normal.

Fair
Value
Estimate
for
Netflix

With
its
2-star
rating,
we
believe
Netflix’s
stock
is
overvalued
compared
with
our
long-term
fair
value
estimate
of
$500,
which
implies
a
multiple
of
25
times
our
2024
earnings
per
share
forecast.
We
project
high-single-digit
average
annual
revenue
growth
over
our
five-year
forecast,
and
we
believe
there’s
room
for
margin
expansion,
as
international
markets
mature
and
benefit
from
greater
scale.

Read
more
about
Netflix’s
fair
value
estimate.

Economic
Moat
Rating

We
assign
Netflix
a
narrow
moat
based
on
intangible
assets
and
a
network
effect.
Two
advantages
set
the
firm
apart
from
its
peers.
First,
it
has
no
legacy
assets
that
are
losing
value
as
society
transitions
to
new
ways
of
consuming
entertainment
at
home,
letting
it
put
its
full
effort
behind
its
core
streaming
offering.

Second,
Netflix
pioneered
its
industry,
providing
a
big
head
start
in
accumulating
subscribers
and
moving
past
the
huge
initial
cash
burn
needed
to
build
a
successful
streaming
service.
This
subscriber
base
was
critical
in
creating
a
virtuous
cycle
that
we
doubt
can
be
breached
by
more
than
a
small
number
of
competitors.

Ultimately,
having
a
successful
streaming
service
is
all
about
offering
customers
a
continuing
depth
of
appealing
content
at
a
price
point
consumers
deem
reasonable.
The
industry
is
not
necessarily
a
zero-sum
game,
as
customers
can
always
add
incremental
subscriptions.
But
consumer
budgets
are
finite,
so
practically
speaking,
we
expect
only
a
handful
of
streaming
services
to
consistently
hold
large
customer
bases,
which
we
think
will
be
necessary
to
continue
funding
content
investments.

Read
more
about
Netflix’s
economic
moat.

Financial
Strength

Netflix
is
in
good
financial
shape.
It
ended
2023
with
a
net
debt/EBITDA
ratio
under
1.0,
holding
about
$7
billion
in
cash
and
$14.5
billion
in
total
debt.
More
importantly,
we
believe
the
years
of
cash
burn
are
behind
the
firm.
Even
after
funding
all
content
costs,
including
spending
that
was
delayed
in
2023
due
to
the
actor
and
writer
strikes,
we
expect
over
$6
billion
in
free
cash
flow
in
2024.

The
firm
does
not
pay
a
dividend,
nor
do
we
expect
it
to
do
so
soon.
It
has
a
share
repurchase
program
that
will
provide
one
outlet
for
some
cash
flow.
We
don’t
expect
acquisitions,
as
those
have
never
been
a
part
of
Netflix’s
strategy,
but
we
believe
it
has
plenty
of
flexibility
to
pursue
any
attractive
opportunity.

Read
more
about
Netflix’s
financial
strength.

Risk
and
Uncertainty

Our
Uncertainty
Rating
for
Netflix
is
High,
largely
based
on
the
evolving
streaming
media
landscape
and
the
additional
competition
the
company
now
faces.
In
our
view,
Netflix’s
tremendous
success
is
due
largely
to
it
being
a
first
mover
in
the
streaming
industry
and
successfully
adapting
its
business
model
while
peers
largely
focused
on
their
legacy
businesses.

Now,
nearly
every
major
media
company
is
promoting
a
stand-alone
streaming
service.
Netflix
is
more
focused
on
profitability
and
cash
generation
than
it
was
in
its
infancy,
meaning
prices
have
risen
substantially
for
consumers
over
the
past
several
years.
Customers
now
have
other
choices
for
streaming
subscriptions
and
the
price
they
pay
for
Netflix
is
no
longer
an
afterthought,
creating
uncertainty
around
the
firm’s
ability
to
attract
and
retain
users.

Read
more
about
Netflix’s
risk
and
uncertainty.

NFLX
Bulls
Say

•
Netflix
has
created
many
hit
shows
exclusively
available
on
its
platform
that
have
attracted
a
massive
customer
base.
The
firm’s
advantage
in
cash
generation
means
this
virtuous
cycle
will
likely
continue.

•
Advertising-supported
subscriptions
will
open
Netflix
to
a
new
base
of
subscribers
and
a
potentially
substantial
new
source
of
revenue.

•
Netflix
has
significant
room
to
grow
in
international
markets,
where
it
has
already
shown
promise
with
local
content.

NFLX
Bears
Say

•
Netflix
is
beginning
to
face
competition
that
it
has
not
had
to
deal
with
in
the
past.
As
consumers
have
more
options
for
quality
streaming
services,
it’s
more
likely
that
the
platform
could
get
cut
out
of
some
consumer
budgets.

•
Netflix’s
US
business
is
mature,
with
a
high
penetration
of
total
households,
meaning
price
increases
need
to
be
the
main
source
of
growth,
and
consumers
may
not
accept
higher
prices.

•
Creating
attractive
content
is
always
a
gamble.
The
allure
of
Netflix’s
service
will
always
be
tenuous,
dependent
on
continually
producing
hits.

This
article
was
compiled
by
Renee
Kaplan.

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