Netflix: Stock of the Week

We’ve raised our fair value estimate for Netflix after more people begin to binge – but there are a few things to watch.

Andrew Willis 20 November, 2023 | 4:37AM
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Key Takeaways for Netflix Stock:

  • We see several reasons for Netflix investors to be optimistic after recent results but subscriber growth is likely to moderate, and production costs are probably going to pick up.
  • There may have been a big pickup in subscribers from the password-sharing crackdown, while more enduring growth may come from selling advertising and cheaper-tier plans to international audiences.
  • Netflix’s long-term growth prospects could be compounded by better programming driven by valuable audience data collected.

 

Andrew Willis: Of all the new subscribers at Netflix NFLX, how many do you think are former password-sharers? Or perhaps that’s just organic growth… Either way, Netflix just posted the best subscriber growth since the pandemic lockdowns of 2020 and we’re starting to see a promising shift in the business model.

Among the 8.8 million net additions in one quarter alone, 30% of the plan mix was in the advertising tier. Meanwhile, investors can look forward to a full ad infrastructure that the company is building out. This avenue of growth will be useful as equity analyst Matthew Dolgin points out that he expects subscriber growth to moderate.

Big Spending to Follow Big Subscriber Growth at Netflix

Netflix stock investors should also consider the challenges ahead in these new chapters for Netflix, like a big increase in spending on production after the end of the writers' and actors’ strikes in Hollywood. The building out of the previously mentioned advertising platform will also cost some money, contributing to an outlook that suggests the stock is currently fairly valued.

Looking long term, investors can certainly be excited about the programming possibilities Netflix has thanks to the swathes of data it has on viewers, allowing it to better tailor content – and influence us to further binge, for better or worse.

There’s also the potential for price increases and increasing revenue per member at Netflix… which might be another reason to invest to at least help offset the monthly cost.

For Morningstar, I’m Andrew Willis.

 

bulls Netflix Bulls Say

  • Netflix's internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years.
  • Netflix has built a substantial content library that will benefit the firm over the long term.
  • International expansion offers attractive markets for adding subscribers.

bears Netflix Bears Say

  • The firm continues to burn billions of dollars of cash to create its original content with no end in sight.
  • The level of competition in the U.S. and internationally is increasing and will continue to do so in the near future.
  • The need for increased content and marketing spend outside of the U.S. will limit the rate of margin expansion for the international segment.

 

Editor's Note: All images are courtesy of Unsplash.com and AP Images. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Netflix Inc654.62 USD0.87Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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