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Netflix Q4 Earnings Preview: Time to Buy NFLX Stock for Long-Term Upside?

Netflix currently has over 220 million paid subscribers and $30 billion in annual revenue Read More...

Netflix is an innovator in the content and streaming industry. Netflix evolved from an online DVD rental business to the leading streaming service provider with a massive and internationally appealing content portfolio. Netflix currently has over 220 million paid subscribers and $30 billion in annual revenue.

But 2022 was not kind to Netflix NFLX. The former darling of Wall Street was at one point down -75% from its all-time high. This fall from grace came after a decade of tremendous performance, with NFLX posting a cumulative stock price appreciation of 2,245% or 37% annualized, even after the correction.

That massive correction must have brought some renewed interest though, because after being crushed the stock has rallied 74% off its low over the last six months. NFLX stock is still down 41% over the last 12 months.

This leaves Netflix at a potentially pivotal junction and makes its upcoming Q4 earnings report of critical importance. NFLX earnings will be released Thursday January 19th after the market close.

Subscriber Growth

NFLX Q1 2022 earnings report brought a dramatic surprise, which initiated the final leg down in the stock’s selloff. During the report, Netflix reported a surprise decline in subscribers. Analysts had projected 2.4 million new subscribers, but the number came back at -200,000. The huge miss also marked Netflix’s first decline in subscribers in nearly a decade.

But after that painful quarter, Netflix appeared to be back on track. Netflix beat subscriber growth expectations over the next two quarters and in Q3 NFLX reported subscriber growth of 2.4 million, exceeding the expected 1 million.

Not surprisingly, subscriber growth is going to be the primary focus of Thursdays report. Consensus estimates currently forecast subscriber growth for the quarter at 4.5 million. This is a lofty projection, so it may be possible that after two very positive quarters Q4 might not be quite so strong.

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Streaming Wars

One factor that may hinder Netflix’s subscriber growth and business model is the stiff competition brought about by the streaming wars. While Netflix is the leading platform, heavyweights like Apple TV, Amazon Prime, HBO Max, Disney+, Peacock, Hulu, YouTube and even TikTok will continue to draw attention from its subscribers.

Disney+ DIS, in particular, is making rapid headway growing its streaming service. Even after launching 12 years later than Netflix, Disney has grown their service to over 160 million subscribers. Disney is aided by its timeless content portfolio and global familiarity of its brands.

Still, NFLX is the leader in engagement. Netflix streaming accounts for 7.6% of TV time, 2.6x Amazon prime’s engagement, and 1.4x Disney+ and Hulu combined.

Attention is the scarce commodity in this economy and these platforms are going to continue to compete at the highest level to get as much of it as possible.

New Tier

A recent development announced in October 2022 was the expansion of a new subscription plan. Netflix’s new plan will be what it calls “Basic with Ads,” which will cost just $6.99 per month in the US. As the name says, this will be a subscription to Netflix’s content, but will come with regular ads, unlike the typical plans. The standard plan is currently $15.49 per month, and the premium plan is $19.99 per month.

There are a few possibilities about why Netflix is adding this new option. It could be that Netflix believes their subscriber growth is plateauing and they need access to a new segment of users.

Another possibility is that this new plan is a response to the changing economic environment. With the rapid increase in cost-of-living, content subscriptions have become a luxury, and families that are cutting budgets may decide to forgo their Netflix. But with this option, they will have the option to stay with the service and subsidize the cost by watching occasional ads.

Zacks Analysis

Netflix currently lands a Zacks Rank #3 (Hold), and its industry rank is currently in the bottom 22%. Additionally, while the current quarter sales are expected to grow 1.7% and current year expected up 6.4% YOY, earnings are looking down. Netflix’s Q4 earnings are expected to shrink -66% to $0.45/share, while current year is forecasted down -8% to $10.31/share.

The last four reports have seen earnings surprise to the upside, but will it continue? Considering the challenging economic environment, highly competitive streaming landscape, and shifting business model strategy, upside surprises are seeming less and less likely. But that said, Netflix’s most accurate earnings estimates comes in 21% higher than the current Zacks consensus. Therefore, Netflix could, in fact, be poised to beat again on the bottom line.

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Valuation

NFLX’s current Price to Sales ratio is 4.8x, which after dipping below the S&P500 average last year, is now back above it. Additionally, at 4.8x it is well below the 10-year median of 7x.

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Conclusion

Netflix stock is at a major injunction along with the rest of big tech. After a brutal 2022, Thursday’s earnings report will likely provide some very valuable color on what 2023 may hold for markets.

Considering NFLX from a long-term perspective, it has of course been a massive winner. While it appears Netflix may have bumped into some macro headwinds, and possible slowing growth it is still a sector leading business. And though the subscriber growth miss seems like it may be the end of an epic run, its possible that it was just a hiccup.

What if Netflix is on its way to a 1 billion subscriber business?

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