Netflix NFLX is scheduled to release its first quarter earnings report. Morningstar offers its opinion on what to watch for in Netflix’s earnings and stock price outlook.
Morningstar Key Metrics for Netflix
Netflix earnings announcement date:
- After the close of trading on Thursday, April 18th
Highlights of Netflix’s Q1 earnings
- US and Canada net subscriber additions and outlook: Performance in 2023 appeared to be largely driven by paid shares. The gains since then have largely passed, but what are the more normalized levels now? The company may comment on this, and the results may provide an answer.
- Latest information about ad-supported subscription tiers: How close is Netflix currently to fully monetizing the ad inventory it can offer to advertisers? In terms of the percentage of ad-supported and ad-free subscriptions, both in the subscriber base and in new additions. Do you have any comments?
- Scenery after the strike: Are profits still reflecting the benefits of the Hollywood strike that halted production in the second half of last year?
- Sports contract: Is there anything new that management can tell you about whether the company is likely to participate in major sports bids? This includes the NBA contract, which is up for renewal in 2025. , is likely to be removed from the exclusive negotiations between Disney DIS and Warner Bros. Discovery WBD.
Netflix fair value estimate
With a 2-star rating, we believe Netflix stock is overvalued compared to our long-term fair value estimate of $425. This means 25 times his earnings per share forecast for 2024. We forecast average annual revenue growth in the low single digits over our five-year forecast and believe there is scope for margin expansion as international markets mature and benefit from increased scale. I am.
Learn more about Netflix’s fair value estimates here.
Evaluation of economic moat
We assign a narrow moat to Netflix based on intangible assets and network effects. The company has two advantages that differentiate it from its streaming peers.
First, the company has no legacy assets that are losing value as society moves to new ways of consuming video entertainment at home, allowing it to focus all its efforts on its core streaming service.
Second, the company is a pioneer in the industry, giving it a huge head start in attracting subscribers and being able to overcome the initial large cash burn that would be required to launch a successful streaming service. Ta. This subscriber base has been critical to creating a virtuous cycle for Netflix that it believes cannot be broken by a small number of competitors, giving it the ability to reap excessive economic profits for the foreseeable future. We believe this is necessary to weaken it.
At the end of the day, the key to a successful streaming service is to consistently provide compelling content at a price point that consumers find reasonable. The streaming industry is not necessarily a zero-sum game, as customers can add incremental subscriptions at any time, but consumers have finite budgets, so only a handful of streaming services can sustain a very large customer base. It is expected that Continue to fund content investments.
Read more about Netflix’s economic moat.
financial strength
Netflix is in good financial shape. The company ended 2023 with a net debt-to-EBITDA ratio of less than 1.0, with approximately $7 billion in cash and $14.5 billion in total debt. More importantly, we believe the company’s long history of cash burn provides ample cash cushion after raising its content budget. Even after putting money into all content costs, including spending deferred to 2023 due to the actors and writers’ strike, his cash flow will exceed his $6 billion in 2024. I predict that. We expect free cash flow to increase annually throughout our forecast.
Netflix does not pay a dividend and has no plans to pay a dividend in the near future. The company has a share buyback program in place, which will provide one outlet for cash flow. While we do not expect acquisitions as they have not previously been part of Netflix’s strategy, we believe there is sufficient flexibility to pursue attractive opportunities.
Learn more about Netflix’s financial strength here.
risk and uncertainty
Our Uncertainty Rating for Netflix is ’High’, which is primarily based on the evolution of the streaming media environment and the additional competition the company currently faces.
In our view, Netflix’s tremendous success is primarily due to the fact that it was a pioneer in the streaming industry and successfully adapted its business model to the direction of the industry while its peers focused on traditional businesses. It depends.
Things have changed, with almost every major media company now pushing standalone streaming services. Netflix is also more focused on profitability and cash generation than when it was founded, which means its consumer prices have increased significantly over the past few years. Customers now have other options for streaming subscriptions, and the price they pay for Netflix is no longer an afterthought, creating uncertainty about the company’s ability to attract and retain customers.
As competitors’ streaming businesses mature, they may bundle their services with or without Netflix or offer them as add-ons for pay-TV subscribers who receive their linear channels. But that’s a foothold Netflix doesn’t currently have. These factors mean that it may be more difficult for the company to grow its subscriber base or generate maximum revenue per subscriber.
Learn more about Netflix’s risks and uncertainties here.
What NFLX stock bulls say
- Netflix has already attracted a huge customer base with many hit shows available exclusively on its platform. Because the company has an advantage in cash generation compared to its competitors, this virtuous cycle is likely to continue as Netflix creates more content that attracts and retains subscribers.
- Ad-supported subscriptions give Netflix a new subscriber base and potentially a significant new source of revenue.
- Netflix has significant room to grow in international markets and is already showing promise with local content.
Opinions of NFLX stock bears
- Netflix is starting to face competition it hasn’t had to deal with before. As consumers increase their choice of high-quality streaming services, it becomes more likely that Netflix will be cut into some consumers’ budgets.
- Because Netflix’s US business is mature and has high household penetration, price increases will need to be the main source of growth, and consumers may not accept higher prices.
- Creating engaging content is always a gamble. The appeal of Netflix’s service has always been tenuous and dependent on the company consistently producing hits.
This article was edited by Liz Angeles.
