Video streaming giant Netflix, Inc. (NFLX) beat Wall Street earnings estimates for the first quarter but offered a lighter-than-expected forecast for the second quarter, demonstrating the mature streaming service's challenges.
Moreover, given the highly competitive landscape of the current streaming industry, I think it would be wise to wait for a better entry point in the stock.
As per the Wall Street Journal, NFLX is planning to launch a live-streamed celebrity golf tournament in the coming fall, featuring professional golfers and Formula One drivers. Despite previous rumors of Netflix bidding for the rights to Formula 1, the streaming giant lost out to ESPN. However, Netflix has been actively pursuing smaller deals in sports such as tennis and cycling.
In addition, NFLX's role in the ongoing writers' strike is significant as it represents one of the tech companies that have fundamentally altered the way writers are paid in the streaming era. Chris Keyser, Co-Chair of Writers Guild of America’s (WGA) Negotiating Committee, criticized NFLX for employing writers for minimal weeks and paying them the least amount possible while demanding maximum output.
Writers are seeking fair compensation, including increased minimum pay and better residuals, from streaming services like NFLX. Despite the industry's profitability, NFLX and other companies have been slow to address these concerns.
However, shares of NFLX have gained 156.8% over the past year and 28.2% over the past month to close the last trading session at $435.73.
Here’s what could influence NFLX’s performance in the upcoming months:
Bleak Financials
During the fiscal first quarter that ended March 31, 2023, NFLX’s revenues increased 3.7% year-over-year to $8.16 billion. However, the company reported an operating income of $1.71 billion, down 13.1% from the prior year’s quarter.
Furthermore, the company’s net income decreased by 18.3% year-over-year to $1.31 billion and its EPS declined 18.4% from the year-ago quarter to $2.88.
Mixed Analyst Estimates
Analysts expect NFLX’s EPS for the fiscal second quarter (ending June 2023) to decrease 11% year-over-year to $2.85. However, its revenue is expected to rise 3.5% from the prior-year quarter to $8.25 billion.
Moreover, the company’s revenue and EPS for fiscal year 2023 are expected to grow 7.4% and 13.2% year-over-year to $33.96 billion and $11.26, respectively.
Robust Profitability
NFLX’s trailing-12-month net income margin of 13.16% is 397.4% higher than the 2.65% industry average. Its trailing-12-month levered FCF margin of 54.48% is 641.3% higher than the 7.35% industry average.
Furthermore, NFLX’s trailing-12-month ROCE, ROTC, and ROTA of 21.33%, 9.13, and 8.49% are higher than the industry averages of 3.29%, 3.76%, and 1.43%, respectively.
Lofty Valuation
In terms of forward non-GAAP P/E, NFLX is currently trading at 37.77x, 161.7% higher than the industry average of 14.43x. The stock’s forward EV/Sales of 5.82x is 225.1% higher than the industry average of 1.79x. Moreover, its forward EV/EBITDA multiple of 27.10 is 225.2% higher than the industry average of 8.33.
In addition, the stock’s forward P/S of 5.55x is 389.9% higher than the industry average of 1.13x. Its forward P/B multiple of 7.86 is considerably higher than the industry average of 1.94.
POWR Ratings Reflect Uncertainty
NFLX has an overall C rating, equating to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. NFLX has a B grade for Quality, in sync with higher-than-industry profitability.
In addition, the stock has a C grade for Stability and Sentiment, consistent with its 60-month beta of 1.26 and mixed analyst estimates. However, NFLX has a D grade for Value, consistent with its higher valuation relative to its industry peers.
NFLX is ranked #33 out of 59 stocks in the Internet industry.
Beyond what I have stated above, we have also given NFLX grades for Growth and Momentum. Get all NFLX’s POWR Ratings here.
Bottom Line
The streaming giant has experienced a notable slowdown in growth due to intensifying competition in the streaming industry. In the first quarter, the company fell short of analyst expectations by only adding 1.75 million streaming subscribers, failing to meet the projected 2.06 million additions.
Moreover, as the streaming video market becomes increasingly saturated, NFLX is scrambling to find ways to make money, such as the controversial password crackdown and the introduction of an ad-supported service.
Despite the stock’s impressive gains over the past year, it could be wise for investors to wait for a better entry point in this stock.
Stocks to Consider Instead of Netflix, Inc. (NFLX)
Given its uncertain short-term prospects, the odds of NFLX outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) and B-rated (Buy) stocks from the Internet industry instead:
trivago N.V. (TRVG)
Yelp Inc. (YELP)
Travelzoo (TZOO)
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
NFLX shares were trading at $444.60 per share on Wednesday morning, up $8.87 (+2.04%). Year-to-date, NFLX has gained 50.77%, versus a 14.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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