Netflix (NFLX) is
set
to
release
its
first-quarter
earnings
report.
Here’s
Morningstar’s
take
on
what
to
look
for
in
Netflix’s
earnings
and
the
outlook
for
its
stock.
•
Fair
Value
Estimate:
$425.00
•
Morningstar
Rating:
2
stars
•
Morningstar Economic
Moat
Rating:
Narrow
•
Morningstar Uncertainty
Rating:
High
Netflix
Earnings
Release
Date
•
Thursday,
April
18,
after
the
close
of
trading.
What
to
Watch
for
In
Netflix’s
Q1
Earnings
•
US
and
Canada
subscriber
net
additions
and
outlook: It
seemed
that
2023
results
got
a
huge
boost
from
paid
sharing.
Has
the
upside
from
that
largely
passed,
and
what
does
a
more
normalised
level
look
like
now?
The
company
may
comment
on
this,
or
we
could
potentially
glean
answers
from
the
results.
•
Update
on
the
advertising-supported
subscription
tier: How
close
is
Netflix
to
fully
monetising
the
ad
inventory
it
can
now
offer
advertisers?
Is
there
any
commentary
on
the
proportion
of
ad-supported
vs.
ad-free
subscriptions,
both
in
the
subscriber
base
and
in
new
additions?
•
Post-strike
landscape: Are
profits
still
reflecting
a
benefit
from
the
Hollywood
strikes
that
shut
down
production
in
last
year’s
second
half?
•
Sports
contracts: Does
management
have
anything
new
to
say
about
whether
the
firm
is
likely
to
get
in
on
bidding
for
major
sports?
That
includes
the
NBA
contract,
which
is
up
for
renewal
in
2025
and
is
moving
out
of
the
exclusive
negotiating
window
with
incumbents
Disney (DIS) and
Warner
Bros.
Discovery (WBD).
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
$425,
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
believe
there’s
room
for
margin
expansion
as
international
markets
mature
and
benefit
from
greater
scale.
Economic
Moat
Rating
We
assign
Netflix
a
narrow
moat
based
on
intangible
assets
and
a
network
effect.
The
company
has
two
advantages
that
set
it
apart
from
its
streaming
peers.
First,
the
firm
has
no
legacy
assets
that
are
losing
value
as
society
transitions
to
new
ways
of
consuming
video
entertainment
at
home,
letting
it
put
its
full
effort
behind
its
core
streaming
offering.
Second,
it
was
the
pioneer
in
its
industry,
providing
it
a
big
head
start
in
accumulating
subscribers
and
moving
past
the
huge
initial
cash
burn
that
we
see
as
necessary
to
build
a
successful
streaming
service.
This
subscriber
base
was
critical
in
creating
a
virtuous
cycle
for
Netflix
that
we
doubt
can
be
breached
by
more
than
a
small
number
of
competitors,
which
is
what
we
think
would
be
necessary
to
dampen
its
ability
to
earn
excess
economic
returns
for
the
foreseeable
future.
Ultimately,
having
a
successful
streaming
service
is
all
about
offering
customers
a
continuing
depth
of
appealing
content
at
a
price
point
that
consumers
deem
reasonable.
The
streaming
industry
is
not
necessarily
a
zero-sum
game,
as
customers
can
always
add
incremental
subscriptions,
but
consumer
budgets
are
finite,
so
we
expect
only
a
handful
of
streaming
services
to
consistently
hold
very
large
customer
bases,
which
we
think
will
be
necessary
to
continue
funding
content
investments.
Financial
Strength
Netflix
is
in
good
financial
shape.
It
ended
2023
with
a
net
debt-to-EBITDA
ratio
under
1.0,
holding
about
$7
billion
in
cash
and
$14.5
billion
in
total
debt.
More
importantly,
we
believe
the
company’s
years
of
cash
burn
are
behind
it,
giving
it
a
good
cash
cushion
after
funding
its
content
budget.
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.
We
expect
free
cash
flow
to
grow
each
year
throughout
our
forecast.
Netflix
does
not
pay
a
dividend,
nor
do
we
expect
it
to
pay
one
in
the
near
future.
It
does
have
a
share
repurchase
program
in
place,
which
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.
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
mainly
due
to
it
being
a
first
mover
in
the
streaming
industry
and
successfully
adapting
its
business
model
to
where
the
industry
was
going
while
its
peers
focused
on
their
legacy
businesses.
The
landscape
has
now
changed,
as
nearly
every
major
media
company
is
promoting
a
stand-alone
streaming
service.
Netflix
is
also
more
focused
on
profitability
and
cash
generation
than
it
was
in
its
infancy,
meaning
prices
for
consumers
have
risen
substantially
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
customers.
As
the
streaming
businesses
of
competitors
mature,
they
may
bundle
their
services
together
–
with
or
without
Netflix
–
or
offer
their
services
as
add-ons
for
pay-TV
subscribers
who
receive
their
linear
channels,
which
is
a
foothold
Netflix
doesn’t
currently
have.
These
factors
mean
the
company
may
have
a
tougher
time
growing
its
subscriber
base
or
generating
as
much
revenue
per
subscriber.
NFLX
Stock
Bulls
Say
•
Netflix
has
already
created
many
hit
shows
that
are
exclusively
available
on
its
platform
and
have
attracted
a
massive
customer
base.
The
firm’s
advantage
in
cash
generation
over
competitors
makes
it
more
likely
this
virtuous
cycle
can
continue,
with
Netflix
creating
more
content
that
attracts
and
holds
subscribers.
•
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
Stock
Bears
Say
•
Netflix
is
beginning
to
face
competition
it
has
not
had
to
deal
with
in
the
past.
As
consumers
have
more
options
for
quality
streaming
services,
it’s
more
likely
that
Netflix
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
the
firm
continually
producing
hits.
This
article
was
compiled
by
Liz
Angeles.
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