With strong subscription growth, here’s what we think of Netflix stock.
Matthew Dolgin, CFA
Securities In This Article
Netflix NFLX released its first-quarter earnings report on April 18. Here’s Morningstar’s take on Netflix’s earnings and the outlook for its stock.
Key Morningstar Metrics for Netflix
- Fair Value Estimate: $440.00
- Morningstar Rating: 2 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
What We Thought of Netflix’s Q1 Earnings
- Subscriber growth was phenomenal, much better than consensus estimates. It was the second-best quarter for net additions since the first half of 2020, when pandemic-induced lockdowns caused a subscriber spike. The continuing run of huge subscriber growth led to strong revenue growth.
- Unlike the results, guidance and the firm’s change in reporting may support our thesis that growth is due to slow after a period that we think was driven significantly by the password-sharing crackdown in 2023. Revenue guidance implies a decelerating rate of sales growth in the second half of 2024, and Netflix’s announcement that it will cease reporting subscriber numbers in 2025 may be a sign subscriber growth is due to cool.
- Profit growth was also impressive, boosted particularly by the 7-percentage-point operating margin expansion. Here too we see why the first quarter was a near-term peak. We think margins in the quarter had a lingering benefit from the strikes that shut down Hollywood productions in the second half of 2023.
- Regarding valuation, we thought there were unreasonably lofty expectations in the market that the company could continue at the pace of the past several quarters. We don’t think that’s the case, and it seems these expectations have eased since the report, making the stock trade closer to its fair value than before.
Fair Value Estimate for Netflix Stock
With its 2-star rating, we believe Netflix’s stock is overvalued compared with our long-term fair value estimate of $440, which implies a multiple of 24 times our 2024 earnings per share forecast. We project high-single-digit average annual revenue growth over our five-year forecast, and we believe there’s room for margin expansion, as international markets mature and benefit from greater scale.
Read more about Netflix’s fair value estimate.
Economic Moat Rating
We assign Netflix a narrow moat based on intangible assets and a network effect. Two advantages set the firm apart from its peers. First, it has no legacy assets that are losing value as society transitions to new ways of consuming entertainment at home, letting it put its full effort behind its core streaming offering.
Second, Netflix pioneered its industry, providing a big head start in accumulating subscribers and moving past the huge initial cash burn needed to build a successful streaming service. This subscriber base was critical in creating a virtuous cycle that we doubt can be breached by more than a small number of competitors.
Read more about Netflix’s economic moat.
Financial Strength
Netflix is in good financial shape. It ended 2023 with a net debt/EBITDA ratio under 1.0, holding about $7 billion in cash and $14.5 billion in total debt. More importantly, we believe the years of cash burn are behind the firm. Even after funding all content costs, including spending that was delayed in 2023 due to the actor and writer strikes, we expect over $6 billion in free cash flow in 2024. We believe free cash flow will grow each year throughout our forecast.
Read more about Netflix’s financial strength.
Risk and Uncertainty
Our Uncertainty Rating for Netflix is High, largely based on the evolving streaming media landscape and the additional competition the company now faces. In our view, Netflix’s tremendous success is due largely to it being a first mover in the streaming industry and successfully adapting its business model while peers largely focused on their legacy businesses.
Read more about Netflix’s risk and uncertainty.
NFLX Bulls Say
- Netflix has created many hit shows that are exclusively available on its platform and have attracted a massive customer base. The firm’s advantage in cash generation means this virtuous cycle will likely continue.
- Advertising-supported subscriptions will open Netflix to a new base of subscribers and a potentially substantial new source of revenue.
- Netflix has significant room to grow in international markets, where it has already shown promise with local content.
NFLX Bears Say
- Netflix is beginning to face competition that it has not had to deal with in the past. As consumers have more options for quality streaming services, it’s more likely that the platform could get cut out of some consumer budgets.
- Netflix’s US business is mature, with a high penetration of total households, meaning price increases need to be the main source of growth, and consumers may not accept higher prices.
- Creating attractive content is always a gamble. The allure of Netflix’s service will always be tenuous, dependent on continually producing hits.
This article was compiled by Liz Angeles.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
More in Stocks
More in Stocks
After Earnings, Is Uber Stock a Buy, a Sell, or Fairly Valued?
With strong bookings growth and Strategic Partnerships, Here’s Our Take on Uber Stock
Malik Ahmed Khan, CFA
Lowe’s Earnings: Tumultuous Macro Weighs on Near-Term Results but Fails to Sway Our Long-Term View
Even with a 3% price drop following the report, Lowe’s stock appears rich.
Jaime M. Katz, CFA
Macy’s Earnings: Plan Taking Shape Despite Tough Environment
We continue to rate Macy’s stock as undervalued.
David Swartz
About the Author
About the Author
Matthew Dolgin
Senior Equity Analyst
Matthew Dolgin is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers companies in the technology sector.
Before joining Morningstar in 2016, Dolgin was a compliance examiner for the National Futures Association.
Dolgin holds a bachelor’s degree in kinesiology from Northern Illinois University, a master’s degree in business administration from the University of Notre Dame, and a juris doctor degree from the Illinois Institute of Technology’s Chicago-Kent College of Law. He holds the Chartered Financial Analyst® designation.
- After Earnings, Is Disney Stock a Buy, a Sell, or Fairly Valued?
- Disney Earnings: Improved Streaming Results Come at the Expense of Continued Linear Weakness
- SiriusXM Earnings: Decent Results With Plan for Technology and Content Investment to Drive Growth
- Paramount Earnings: CEO Has Gone, For-Sale Sign Is Up; Good Results Would’ve Been Nice to Learn
- After Earnings, Is Netflix Stock a Buy, a Sell, or Fairly Valued?
- This Dividend Stock With a Nearly 7% Yield Is a Buy After Selloff
- Netflix Earnings: Incredible Quarter, but Investors Fear Slowdown
- Going Into Earnings, Is Netflix Stock a Buy, a Sell, or Fairly Valued?
- 3 Cheap Stocks to Watch in the Fight Over Sports Streaming
- Paramount Earnings: Many Positive Trends While Industry Headwinds Hinder Sales and Profits