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

With an eye on Q1 subscription trends, here’s what we think of Netflix stock.

Matthew Dolgin 17 April, 2024 | 8:34AM
Facebook Twitter LinkedIn

netflix logo in app

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.

Key Morningstar Metrics for Netflix

• Fair Value Estimate: US$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.

Get the Latest Market Insights in Your Inbox

Sign up to Our Newsletters Now

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Netflix Inc621.10 USD1.73Rating

About Author

Matthew Dolgin  Matthew Dolgin is an analyst with Morningstar

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy       Disclosures        Accessibility