After underperforming the broader markets following the easing of COVID restrictions in 2022, Netflix (NFLX) stock roared back strongly. The stock has gained more than 136% over the past year and has risen by about 48.5% year-to-date, easily outperforming the S&P 500 Index (SPY) ($SPX) . Despite the recent rally, shares of this streaming giant are still down approximately 37% from all-time highs.
While investors cheered the company’s recent efforts to reaccelerate growth, let’s understand whether it makes sense to buy NFLX stock at the current valuation.
An Overview Of Netflix
Netflix is a leading video-on-demand streaming service provider. It offers TV series, films, and games across various languages and genres in 190 countries. The company primarily derives all of its revenues via membership fees related to streaming content. NFLX offers a variety of streaming membership plans that varies by country and features.
At the end of the first quarter (ended March 31), Netflix had a global streaming paid membership base of 232.5 million subscribers.
Growth Returns At Netflix
After witnessing stellar demand during the COVID-led lockdowns, NFLX faced a series of headwinds in the post-pandemic world. These included the normalization of subscriber growth, challenges in adding new paid members due to the tough economic environment, and heightened competitive activity.
However, the entertainment giant took initiatives to monetize its platform better, including the mixture of intriguing content, the crackdown on password sharing, and the introduction of ad-supported subscription plans.
Thanks to its intriguing content, Netflix was able to grow engagement and revenues. Further, it managed to add new paid members globally over the past three consecutive quarters. NFLX started 2023 on a solid note by adding 1.75 million new paid customers in the first quarter (Q1).
It benefitted from the strong content slate led by the successful returning seasons of Outer Banks, Ginny & Georgia, and You. Also, The Night Agent, The Glory, and Full Swing emerged as new hits.
Higher engagement and an increase in subscriber growth led to a year-over-year increase in its top line in Q1. Furthermore, its operating income and operating margin improved significantly on a sequential basis.
Momentum to Sustain in Coming Quarters
The market for streaming remains intensely competitive and subject to rapid change, which is why Netflix is focusing on striking the right balance between content and costs, which will drive its margins and free cash flows.
Also, the launch of an ad-supported tier and a crackdown on password sharing will further drive its free cash flows in the coming quarters.
Netflix’s multiple subscription plans could drive new customer growth and reduce churn rate. Further, the password-sharing crackdown is likely to result in higher average revenue per user and expand its paid membership base.
For instance, Netflix announced its ad member base has more than doubled. However, Netflix’s ad-supported plan had about five million active users globally in just six months. It highlighted that most customers are opting for the ad-supported plan in countries where it is available.
The company’s revenue and margins are growing. At the same time, the broader rollout of paid password-sharing plan and expansion of the ad business will likely support its growth in the coming quarters. Moreover, Netflix’s management remains upbeat and expects to generate $3.5 billion in free cash in 2023.
Positives Appear to be Priced in Netflix Stock
While Netflix is heading in the right direction and scaling its streaming service effectively, the recent run suggests that the positives are already priced in the stock. Further, the company is growing but at a slower pace.
Also, it could continue to face obstacles in the near future, like the weakness in the ad market due to macro uncertainty. Further, as NFLX must continually add new paid members to grow its business, the expected increase in global competition could pose challenges.
The Final Takeaway
Netflix is the leader in the global video-on-demand streaming market, with high-quality content and a large subscriber base. Also, the company is ramping up its initiatives to better monetize its platform, reaccelerate growth, and deliver solid margins and free cash flows.
Overall, NFLX has impressed with its recent performance and is poised to grow its business in the long term. However, I believe investors should wait for a pullback in NFLX stock, which will provide a better/cheaper entry point. Given the appreciation in its price, Netflix stock trades at a price-to-earnings (PE) multiple of 47.1. Its valuation appears rich, given the projected EPS growth of over 13% and 30% in 2023 and 2024. Further, the macroeconomic uncertainty will likely limit the growth of its ad business in the short term.
Out of the 32 analysts covering NFLX stock, 18 have a “strong buy” recommendation, 12 analysts recommend a “Hold,” and two maintain a “Strong sell” recommendation. And at a current price of $435.30, Netflix stock is trading
12.7% higher than analysts’ mean price target of $386.10.
On the date of publication, Sneha Nahata 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.
