Will Netflix stock hit new all-time highs after earnings?

After recording one of the best two-year performances in the technology sector, shares of Netflix Inc. NASDAQ: NFLX I’m at an inflection point. Markets may be wondering whether the stock will hit a new all-time high or give up some of the stellar gains it has given investors since the COVID-19 pandemic.

With attention on the recent quarterly earnings announcement, Netflix shares changed little during Wednesday’s trading session. While the broader S&P 500 index fell nearly 1% daily and 5% monthly, Netflix shares held firm, refusing to fall from their 52-week high price.

Despite the hold, the company’s recent financial results should have been enough to give shareholders a reason to celebrate. However, the stock did not move as expected. This raises the question of whether the stock has the sentiment it once relied on or whether it may be overpriced today, as Nvidia Co. NASDAQ:NVDA.

Netflix is ​​better than ever

The fourth quarter of 2023 showed a strong trend for Netflix, with double-digit growth across the board. Revenue rose 12.5% ​​over the year despite 2023 bringing troubling inflation that has hit U.S. consumers’ budgets.

Since Netflix can be considered part of the consumer staples sector, where it was once a pure discretionary play, consumer budgets could always find room for a monthly Netflix subscription. This entrenchment is reflected in Netflix’s improving margins.

Operating margins went from 7% in the same quarter last year to 16.9% in the most recent quarter. Net income margins reached nearly 11% after generating earnings of $938 million.

While creative accounting can manipulate net income, free cash flow (operating cash flow minus capital expenditures) is set in stone. Netflix generated nearly $1.6 billion in free cash flow during the quarter; a year ago, this figure reached only $332 million.

What did management do with all this extra money? They agreed to buy back shares worth up to $2.5 billion. Stock buybacks typically mean that management believes the shares are cheaper than their intrinsic value.

Additionally, $8.4 billion remains in the current buyback program, or about 3% of the company’s market capitalization.

Subsequently, concerns about a weakening of US consumption increased Bank of America Co. NYSE:BAC AND Citigroup Inc. NYSE:C have released their earnings, showing an increase in credit card delinquencies and lower FICO scores. However, despite the more restrictive conditions, paid Netflix subscriptions increased 12.8% during the quarter.

And there may be a higher ceiling

Although it has a lot of competition in the streaming space, with similar players The Walt Disney Co. NYSE: DIS AND Roku Inc. NASDAQ: ROKUin the press release, management made it very clear that these names do not pose a threat to Netflix’s market positioning.

In terms of viewership, including streaming and TV, Netflix is ​​still at the top. With an 8% share in the US, Netflix beats Disney’s 5% (including Hulu) and is only beaten by YouTube’s 9%. However, YouTube does not offer any of the streaming content that Netflix can offer users, as it is more of a hub.

The same trend is seen in other markets, of which the UK is one of the largest hubs. With a 9% share, Netflix also beats Disney’s 4% in the region.

Because of this, Netflix has outperformed Disney shares by up to 70% over the past year. The same can be said of Roku, as Netflix has left that stock behind by 93.2%. After choosing its favorite, the market shows Main Street other ways Netflix is ​​the winner.

Netflix analysts expect earnings per share (EPS) to grow 23% this year. Morgan Stanley raised its price target to $700, predicting a 15% upside from the current price.

This compares to Disney’s projections, which show only 19% EPS growth. At the same time, analysts predicted only a 9% upside for Disney shares from their price target of $124.50, a third of Netflix’s upside.

Roku has no earnings to speak of, so comparing it to these giants wouldn’t be fair. For Netflix, markets like these projections are why they are willing to pay a 43% forward P/E premium over Disney’s earnings.

Paying a forward P/E of 29.4x for Netflix’s future earnings, compared to Disney’s 20.6x valuation, tells investors how markets prefer to be exposed to Netflix as it streams over others competitors.

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