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FAANG is an acronym for mega-cap tech companies such as Meta Platforms (META) (previously called Facebook), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL), formerly known as Google. Each of these stocks has gained significant ground on the back of an artificial intelligence (AI)-fueled rally year-to-date.
Here is how the FAANG stocks stand so far in 2023:
- META is up 153%
- AMZN has surged 63%
- GOOGL has gained 53%
- AAPL has advanced 37%
- NFLX is up 33%
The Nasdaq 100 Index ($IUXX) is up 38% year-to-date - which means not all of these FAANG giants are outperforming the wider market. In fact, NFLX - the laggard of the group - is now down more than 17% from its mid-July closing high of $477.59, setting up a potential dip-buying opportunity.
Netflix Adds Subscribers Amid Stiff Competition
Valued at a market cap of $175.57 billion, Netflix is the largest streaming platform globally. Despite its massive size, Netflix increased sales from roughly $20 billion in 2019 to $31.6 billion in 2022. But top-line growth has tailed off in the last 18 months amid rising competition. With 238.3 million subscribers, Netflix is battling against saturation in some markets, and sales grew by just 3% year over year in the June quarter to $3.6 billion.
Faced with a sluggish macro environment and lower consumer spending, Netflix has focused on reducing costs and increasing customer choice - a strategy that has helped to drive its share price higher in 2023. For example, Netflix introduced an ad-supported subscription tier to expand its customer base and retain existing users. Subscribers can pay just $6.99 per month for the ad-supported plan - much lower than the Premium Plan, which costs $19.99 per month.
At a recent Bank of America (BAC) conference, Netflix emphasized it aims to scale the reach of its new service tier and increase ad spending on the platform, which would negatively impact profit margins, driving share prices lower. But the ad tier might be quite beneficial for Netflix in the long run, while unlocking another revenue stream for the streaming heavyweight. The company emphasized after accounting for ad revenue, the tier generates $15.49 per month on a per-user basis, which is similar to its standard tier.
Its crackdown on password sharing also enabled Netflix to increase subscribers by 5.9 million in Q2, significantly higher than forecasts of 1.7 million. In fact, the subscriber count was up 8% compared to the prior-year period, the fastest growth for the company since Q4 of 2021.
Analysts Expect More Upside for NFLX
There's no shortage of negative sentiment around the ongoing strikes in Hollywood, which have already delayed content production schedules for Netflix and other streaming peers. However, analysts expect revenue growth to accelerate in the second half of 2023. On average, sales are forecast to increase by 6.7% to $33.7 billion in 2023 and by 13.5% to $38.3 billion in 2024.
At the same time, adjusted earnings are projected to expand from $9.95 per share in 2022 to $11.88 per share in 2023 and $15.43 by 2024. So, priced at 4.5x 2024 sales and 25x forward earnings, NFLX is somewhat expensive compared to the S&P 500 Index ($SPX) - but it is also forecast to grow at a faster pace. Netflix has beaten analysts' earnings estimates in three of the last four quarters while improving its forecasts, resulting in analyst upgrades.
Out of the 35 analysts covering Netflix stock, 20 have a “strong buy” recommendation, 13 recommend “hold,” and two recommend “strong sell.” Based on analysts' average price target of $439.97, Wall Street expects upside of about 12% in the next 12 months.
Netflix continues to invest billions of dollars in creating region-specific content, enabling the company to gain traction in emerging markets such as India. The cord-cutting phenomenon also remains a massive tailwind for Netflix at the global level, providing it with enough room to grow sales and improve cash flows consistently.
At current levels, this FAANG stock looks like a solid growth name to buy on the dip.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
