Key points
- Netflix shares fell 5% following its first-quarter earnings release, opening up a solid buying opportunity for investors.
- The company is no longer a growth stock, but a mature technology company growing, expanding its margin and buying back shares.
- Analysts have liked the report and are raising their price targets, leading this market to retest its all-time high.
- 5 titles we prefer to Netflix
Netflix NASDAQ: NFLX shares fell 5% following the first quarter release and guidance update, opening up a buying opportunity that won’t last long. The sell-off is a knee-jerk reaction to reporting changes that have little bearing on the company’s prospects. Netflix says it will stop reporting subscriber numbers next year because the business has evolved and the numbers are less important than before. It instead focuses on revenue growth, margin expansion, cash flow, free cash flow and returns on capital, which are much more important.
Subscriber growth was one thing when the company wasn’t making money; now that this is a mature blue-chip tech stock making money, it’s time to focus on that.
Netflix has a strong quarter and raises guidance
Netflix had a solid quarter, producing $9.37 billion in revenue. Revenue grew 14.8% due to the combined impact of increased subscriber numbers and higher prices. Global streaming paid subscriptions grew 3.5% sequentially and 16% year-over-year, offset by weakness in ARM. USCAN led with a 7% increase in ARM, while all other segments remained flat or declining.
The margin news is the brightest spot in the report. The company is gaining traction with increased member numbers and higher prices, and making solid improvements to the bottom line. The company reported a 700 basis point increase in operating margin due to timing of payments and spending restraint. Nonetheless, the 28.1% margin is among the highest on record and exceeds the 10-year average by 1,200 basis points, and the strength is expected to persist going forward.
The ride is solid, but there’s a caveat. The company raised its revenue and earnings targets, but the news is mixed compared to the consensus reported by Marketbeat. On the bright side, strong margins and above-target earnings offset weaker-than-expected revenue. The company raised its full-year operating margin target by 100 basis points to 25% and its second-quarter EPS forecast to $4.68 versus consensus of $4.55.
(As of 04/19/2024 ET)
- 52 week interval
- $315.62
▼
$639.00
- P/E ratio
- 46.21
- Price target
- $628.76
Analysts guide the Netflix market higher
Analyst activity is mixed following the report, but the bottom line is bullish for the market. Marketbeat tracks a downgrade to Hold and a reduced price target, but further upgrades and price target increases offset them. The consensus remains firm at Moderate Buy, moving towards Strong Buy with a price target near $630. The $630 price target implies approximately 3.5% upside for the market and is up 10% in the last 30 days. Since many of the new targets are at the high end of the range, this market could move back up to test all-time highs soon.
Capital returns will help support the market. Netflix does not pay dividends but uses excess capital to buy back shares. Excess capital is free cash flow after business investments and balance sheet maintenance, which aims to maintain a credit quality rating.
The company announced changes to its financial strategy, including increasing its revolving credit facility to increase liquidity and improve cash flow efficiency. The company specifically stated that it has no intention of using leverage to support the buybacks. Repurchases were substantial in 2023 and the first quarter of 2024, reducing the average fully diluted product count by 2.6%. Moody’s rates NFLX credit at Baa2 with a positive outlook.
Netflix falls to critical support
There are many reasons to believe that NFLX stock will recover quickly, but that doesn’t mean it will. The market is down 5% on Q1 news and may break critical support. If the market does not support the stock price at $575, there is a risk that it will fall into a trading range where it will get stuck. The company is in good shape and growing, but the 35X earnings valuation is high. If the market supports this stock to $575, a rebound should begin soon. Even so, in this scenario, there is a risk of range-bound trades only at higher levels. Critical resistance is near $640 and could be strong.
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