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With a YTD gain of just about 27%, Netflix (NFLX) is the worst-performing FAANG stock of 2023. It was the second worst-performing constituent of the elite group in 2022, and could very well have been the worst performer overall - as it was for a large part of the year - if not for the even steeper decline in Meta Platforms (META).
However, Meta’s stock has staged a remarkable turnaround in 2023. With a gain of 171% in 2023, it is not only the best-performing FAANG stock of the year, but also the second-best performing S&P 500 Index ($SPX) constituent.
Netflix’s dismal run, meanwhile, has continued into this year, and shares of the streaming giant are underperforming the broader Nasdaq Composite ($NASX) - which, incidentally, had its best first-half performance in four decades on the back of the rise in tech stocks.
Why Is Netflix Stock Dropping?
Netflix stock is dropping on growth woes, and it closed in the red yesterday even as broader markets closed in the green. A recent survey conducted by Piper Sandler showed that teens are spending more time on YouTube as compared to Netflix, which is negative for the latter - particularly given that it's losing popularity as compared to YouTube, which is free (unless you opt for an ad-free version).
Netflix has also undergone a series of top-level executive shakeups. Last week, it replaced President of Advertising Jeremi Gorman with Amy Reinhard. It also elevated Elizabeth Stone to the rank of chief technology officer and Eunice Kim as the chief product officer.
In January, the company’s co-founder and co-CEO Reed Hastings also transitioned to the role of executive chairman, and handed over the baton to then-chief operating officer Greg Peters.
More importantly, Netflix is battling slower growth. Its revenue – which it now sees as a better indicator of growth than the rise in subscribers – has risen in the low single digits for the last three quarters. It missed revenue estimates for both Q1 and Q2, and even as it added a respectable 5.9 million subscribers in Q2, the stock closed in the red post-earnings over growth concerns and a lack of specifics about its password crackdown and ad-supported tier during the earnings call.
Netflix Battles Slowing Growth
Netflix lost streaming subscribers in the first half of 2022, partially because of the carry forward in demand over the preceding two years due to COVID-19 lockdowns. The company has reached near saturation in developed markets, and hasn’t been able to crack the code in some emerging (but large) markets like India.
Amid a structural growth slowdown, the company pivoted to an ad-supported tier - not only to attract new users with the lower-priced tier, but also to improve its average revenue per user. Netflix also started cracking down on password sharing – a practice it believes is quite rampant, with an estimated 100 million households watching its content through shared passwords.
Optimism over both of these strategies helped Netflix rebound from its lows in 2022, but the lack of specifics on these initiatives in recent earnings calls has made markets apprehensive.
What to Expect from NFLX’s Q3 Earnings
As is the case every quarter, Netflix will kickstart the FAANG earnings season when it reports Q3 earnings on Oct. 18. Analysts expect the revenues to rise 7.7% YoY to $8.54 billion in the quarter – which is in line with the $8.5 billion that Netflix forecast during the Q2 earnings call. The consensus is also calling for per-share earnings to rise 12.6% YoY in the quarter.
NFLX Forecast Before Q3 Earnings
Ahead of its Q3 earnings, analysts are optimistic about the shares, especially amid reports of price increases for its streaming plans.
Overall, Wall Street analysts rate NFLX’s stock as a Moderate Buy heading into its Q3 release. Of the 37 analysts covering Netflix, 21 rate it as a Strong Buy – which, in percentage terms, is the lowest among FAANG peers. Fourteen more analysts rate the stock as a Hold, while the remaining 2 have a Strong Sell rating.
The mean target price of $451.25 is almost 21% over current stock prices.
Is Netflix Stock a Buy or Sell Ahead of Q3 Earnings?
The bar is set low for Netflix heading into its Q3 earnings, which - coupled with the YTD underperformance versus other tech names - suggests that the stock has a nice setup ahead of the report. However, I would be apprehensive about buying Netflix stock at these prices, primarily due to its valuations.
The stock trades at a next 12-month price-to-earnings multiple of 27.5x - and while such multiples would have appeared mouth-watering a couple of years back, given the structural slowdown in Netflix’s growth and the ongoing competition among streaming companies, I find the multiples somewhat elevated.
To be sure, Netflix still has a strong lead in the streaming industry, and has been posting sustainable profits and cash flows even as rivals like Disney (DIS) struggle with perennial losses. However, with streaming no longer the kind of growth industry it once was, and user-generated content on platforms like YouTube and TikTok gaining traction among users, the streaming industry might see a structural reset in valuations.
As for Netflix's upcoming earnings, while the usual boilerplate disclaimer would be that past performance is no indication of future returns - the Los Gatos-headquartered company does not have history on its side, as it has fallen after 7 of its last 10 earnings releases.
On the date of publication, Mohit Oberoi had a position in: DIS , META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
