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

Netflix NFLX released its first-quarter earnings report on April 18. Here’s Morningstar’s take on Netflix’s earnings and the outlook for its stock.

Key Morningstar Metrics for Netflix

• Fair Value Estimate: $440.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Netflix’s Q1 Earnings

• Subscriber growth was phenomenal, much better than consensus estimates. It was the second-best quarter for net additions since the first half of 2020, when pandemic-induced lockdowns caused a subscriber spike. The continuing run of huge subscriber growth led to strong revenue growth.
• Unlike the results, guidance and the firm’s change in reporting may support our thesis that growth is due to slow after a period that we think was driven significantly by the password-sharing crackdown in 2023. Revenue guidance implies a decelerating rate of sales growth in the second half of 2024, and Netflix’s announcement that it will cease reporting subscriber numbers in 2025 may be a sign subscriber growth is due to cool.
• Profit growth was also impressive, boosted particularly by the 7-percentage-point operating margin expansion. Here too we see why the first quarter was a near-term peak. We think margins in the quarter had a lingering benefit from the strikes that shut down Hollywood productions in the second half of 2023.
• Regarding valuation, we thought there were unreasonably lofty expectations in the market that the company could continue at the pace of the past several quarters. We don’t think that’s the case, and it seems these expectations have eased since the report, making the stock trade closer to its fair value than before.

Fair Value Estimate for Netflix Stock

With its 2-star rating, we believe Netflix’s stock is overvalued compared with our long-term fair value estimate of $440, which implies a multiple of 24 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.

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. We believe free cash flow will grow each year throughout our forecast.

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.

Read more about Netflix’s risk and uncertainty.

NFLX Bulls Say

• Netflix has 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 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 Liz Angeles.