Case Study: Netflix (NFLX) stock according to high performing analysts
Key Points
Performance
Netflix shares fell by 2.47% this week, pushing their year-to-date gains down to 11.20%. This means that Netflix has outperformed the S&P 500 on the year; however, its performance is lagging behind the tech-heavy Nasdaq. The S&P 500 and the Nasdaq Composite Index are up by 8.09% and 16.23%, respectively, during 2023 thus far.
Event & Impact
Netflix posted its first quarter results this week, missing top-line expectations and beating bottom-line estimates. During Q1, NFLX’s revenue totaled $8.16 billion, missing Wall Street’s consensus estimate by $20 million. Netflix’s Q1 GAAP earnings per share came in at $2.88, beating the consensus estimate by $0.01/share.
Noteworthy News:
During Q1 Netflix saw its top-line growth slow and its margins compress. The company continues to work on its password sharing crackdown, which has the potential to drive paying subscriber growth over the long-term. During Q1, Netflix’s paid membership hit a record his of 235.5 million.
Nobias Insights
47% of recent articles published by credible authors focused on NFLX shares offer a “bullish” bias. Three out of five credible Wall Street analysts who cover Netflix believe that shares are likely to rise in value. The average price target being applied to NFLX by these credible analysts is $348.00, which implies upside potential of approximately 6.1% relative to the stock’s current share price of $327.98.
Bullish Take Royston Yang, a Nobias 4-star rated author, said, “Paid memberships continued to rise to a new record of 232.5 million, up 4.9% year on year, adding another 1.75 million members to Netflix’s database,”
Bearish Take Nobias 5-star rated author, David Trainer, stated, “As we noted in our report Netflix: A Meme Stock Original, NFLX has historically moved more on narrative and sentiment than fundamentals. We think it's time investors wake up to the company's fundamentals and value it accordingly.”
NFLX Apr 2023
Netflix reported its first quarter earnings this week and posted mixed results. The company beat analyst estimates on the top-line, driven by a record number of paying subscribers. However, Netflix saw its margins compress, which caused its earnings-per-share results to lag consensus expectations.
The stock pulled back 10% on the earnings report initially, but ended up rallying on future guidance provided by management. NFLX shares ended the week down by 2.47% and after this slight dip shares offer mid-single digit upside potential relative to the average price target being applied to shares by the credible analysts that the Nobias algorithm tracks.
Bullish Nobias Credible Analysts Opinions:
Luke Lango, a Nobias 4-star rated author, published a post-earnings report on Netflix this week at InvestorPlace. Lango began his article discussing the broader market’s valuation and the potential implication of upcoming tech-stock earnings. He wrote, “At 19X forward earnings today, then, the stock market is trading at a very fair valuation.”
“P/E multiples have some, but not much, room to expand if Treasury yields fall (they are inversely related),” he continued. “Therefore,” Lango concluded, “the next leg higher in stocks will need to be driven by higher earnings – not P/E multiple expansion.”
With that in mind, he is bullish on tech stocks moving forward; not because they’ve been out of favor of the last year or so, but because of the secular growth potential that they offer investors from a fundamental metric perspective.
Transitioning to Netflix’s first quarter results, Lango wrote, “Netflix’s earnings themselves weren’t great.” “Now, the company beat most first-quarter metrics, including subscribers, revenues, profit margins, and earnings. But management offered guidance to lighter-than-expected revenues, margins, earnings, and subscriber growth in the second quarter,” he added.
Lango noted that NFLX shares fell roughly 10% right after these results were published; however, the stock fought back up to the flatline area once the market digested the reason for the poor guidance. “In short,” Lango said, “Netflix planned to expand its password-sharing crackdown efforts toward the end of the first quarter of 2023. That included a rollout of those efforts in the all-important U.S. market.”
“Instead,” he continued, “Netflix pushed back that expansion to the second quarter, which means the financial benefits of those efforts will be reflected in the third-quarter numbers, not the second-quarter numbers.” He pointed to the Canadian market as a bullish sign for investors. “Canada is a good analog for the U.S.,” he stated.
In Canada,” Lango wrote, “where these efforts have already launched, the paid membership base is now larger than it was prior to the crackdown. And revenue has accelerated to above pre-password-sharing levels.” And therefore, regarding this thesis for strong fundamental growth moving forward, Lango concluded, “Q3 Netflix earnings should reflect the big growth acceleration investors were expecting in Q2.”
Regarding secular growth potential, Royston Yang, a Nobias 4-star rated author, published an article at Yahoo Finance this week titled, “4 US Growth Stocks Whose Share Prices Can Continue Climbing” Looking at NFLX’s Q1 results, Yang wrote, “The company is off to a slow start for the first quarter of 2023 (1Q 2023), with revenue growing 3.7% year on year to US$8.2 billion.”
“Operating margin rebounded strongly to 21%, up from the previous quarter’s 7%, but was down from 1Q 2022’s operating margin of 25.7%,” he said. “Consequently,” Yang continued, “net profit fell by 18.3% year on year to US$1.3 billion.” However, he believes that these growth headwinds are short-term in nature and that Netflix’s growing subscriber base points towards more long-term growth.
“Paid memberships continued to rise to a new record of 232.5 million, up 4.9% year on year, adding another 1.75 million members to Netflix’s database,” Yang stated. Yang believes that Netflix can continue to grow rapidly in international markets. He concluded his bullish outlook by writing, “Netflix also quoted figures from Nielsen that showed it had a market share of 2% to 4% in markets such as Brazil, Mexico and Poland, suggesting that it has plenty of opportunity to capture more market share.”
Bearish Nobias Credible Analysts Opinions:
David Trainer, a Nobias 5-star rated author, expressed a clearly bearish sentiment in his post-earnings write up on Netflix that was published at Forbes and Seeking Alpha this week. Trainer wrote, “As we noted in our report Netflix: A Meme Stock Original, NFLX has historically moved more on narrative and sentiment than fundamentals. We think it's time investors wake up to the company's fundamentals and value it accordingly.”
“In 1Q23, Netflix's revenue grew just 3.7% YoY, which is well below the long-term goal to "sustain double-digit revenue growth" announced during the company's 4Q22 earnings release,” he said. Looking at bottom-line results, Trainer said, “Profitability is heading in the wrong direction as well. Netflix's reported operating margin was 21% in 1Q23, which is down from 25.1% in 1Q22.”
“Expect further margin deterioration going forward, given that management forecasts operating margins of 19% in 2Q23, which would be down from 19.8% in 2Q22,” he added. Trainer also wrote, “Netflix has generated negative free cash flow in 10 out of the past 12 years, and a cumulative -$7.6 billion in FCF over the past five years alone.”
After analyzing the company’s low growth during Q1 and management’s tepid Q2 guidance, Trainer said, “Warren Buffett believes "streaming isn't a very good business", and with Netflix, we agree.” Trainer called Netflix “just another streamer” and said, “ While Netflix was once the dominant player in the streaming industry, its recent actions prove that its first-mover advantages are gone.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
After analyzing Netflx’s current fundamentals and adding in his own growth estimates, Trainer concluded that Netflix shares are worth $175.00/share. That implies nearly 50% downside, which is why he remains bearish on this stock.
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, looking at recent reports published by the credible authors that Nobias tracks, Trainer is in the majority when it comes to his bearish outlook on NFLX. Only 47% of recent articles have expressed a “Bullish” bias towards Netflix shares.
However, the credible Wall Street analysts that the Nobias algorithm tracks lean the other way. Three out of five credible analysts that Nobias tracks who have expressed an opinion on NFLX shares believe that they’re likely to increase in value.
We haven’t seen any credible analysts update their price targets for Netflix since the company published its Q1 results; however, after NFLX’s Q4 results, all 5 of them increased their price targets for shares.
After Q4:
Michael Morris of Guggenheim raised his price target from $305 to $375.
Mark Mahaney of Evercore ISI raised his price target from $340 to $400.
Peter Supino of Wolfe Research raised his price target from $366 to $417.
William Power of Robert Baird raised his price target from $275 to $325.
Mathew Harrigan of Benchmark raised his price target from $225 to $250.
Morris is a 5-star rated Nobias analyst and the rest of these men receive 4-star Nobias ratings.
Currently, the average price target being applied to NFLX by the credible analyst community is $348.00. Today Netflix trades for $327.98. Therefore, the average credible analyst price target implies upside potential of approximately 6.1%.
Disclosure: Nicholas Ward has no NFLX position Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.