Netflix (NFLX) stock has been one of the better performing names in large-cap tech, rising almost 90% in the past six months, besting not only the S&P 500 index, but also the Nasdaq-100 during that time span. With shares already up 15% in 2023, it appears the market has regained its confidence in the streaming giant. But is there still a buying opportunity?
The streaming pioneer is set to report fourth quarter fiscal 2022 earnings results after the closing bell Thursday. The company’s growth initiatives have begun to pay dividends. But it wasn’t always that way. The market was once concerned about Netflix’s struggles to generate cash flow. The fact that the company had few sources of revenue generation, and tied to only subscription revenue, highlighted the increased importance of Netflix generating higher streaming margins versus its competitors.
Analysts were readily comparing Netflix to Disney (DIS), which is a well-diversified conglomerate with not only theatrical releases, but also cable assets and theme parks in addition to its Disney+ streaming platform. However, fast forward two quarters later, Netflix stock has escaped that comparison and nearly doubled from its 52-week lows, raising the market cap back north of $140 billion. Not only is the company’s efforts to grow its ad-supported tier segment working, the management has also implemented ways to crack down on password sharing.
In the Q3 results, the company’s average revenue per membership (ARM) grew of 8% year over year, accelerating from 6% and 7% growth in the prior two quarters, respectively. Heading into the Q4, it’s possible that the ARM could be even stronger. Regarding the ad-supported tier, which was launched in twelve global markets in November, it exposes Netflix to an estimated $140 billion of brand advertising spending. Combine with the company’s upcoming content launches, there is a compelling case to remain invested in the stock.
For the quarter that ended December, Wall Street expects Netflix to earn 44 cents per share on revenue of $7.82 billion. This compares to the year-ago quarter when earnings were $1.33 per share on $7.71 billion in revenue. For the full year, Netflix’s earnings are projected to decline 7.7% year over year to $10.37 per share, while full-year revenue of $31.67 billion would mark an increase of 6.6% year over year.
There continues to be several burning questions for Netflix management regarding how fast the competition has caught up. The company has done a solid job executing on the most-pressing ones, particularly the advertising-supported tier. Last week analyst Andrew Uerkwitz of investment firm Jefferies upgraded the stock to Buy from Hold. Although Uerkwitz warned that the ad-supported subscription tier "will be slow to kick in,” he noted that the moves, including the crack down on password sharing, "should drive top line outperformance."
In the third quarter, the company reported revenue of $9.93 billion, up 6% year over year, topping estimates by $82.7 million. Q3 adjusted EPS was $3.10 per share, which beat Street consensus by 94 cents per share. During the quarter, Netflix added 2.41 million net new subscribers, which more than double the 1 million it forecast, bringing its worldwide subscriber total to 223.09 million.
"Thank God we're done with shrinking quarters," said CEO Reed Hastings. Added that it's "a big deal to go back to the positivity.” The company saw no signs of slowing down, forecasting to add 4.5 million new subscribers during the fourth quarter. On Thursday, to keep Netflix stock on its trajectory, beyond a top- and bottom-line beat, the company will need to issue strong guidance for the next quarter and full year.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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