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Shares of Netflix (NFLX) climbed to a 17-month high today and are up more than +171% from a 6-year low in May 2022. The stock has surged over the past year after introducing an ad-supported subscription plan and cracking down on password sharing. However, the rally has raised valuation concerns ahead of its second-quarter earnings results on Wednesday, as it trades 8% above the average analyst price target for the next 12 months.
According to Bloomberg data, Netflix trades at 34 times expected profits over the next 12 months. That’s up from about 27 times at the start of the year and represents a significant premium to the Nasdaq 100 Stock Index ($IUXX) (QQQ). Deutsche Bank said, “The valuation case for Netflix has gotten tougher,” but we think the setup for the stock is positive heading into Q2 earnings results.
Netflix, founded in 1997 as a DVD postal service, remains the leader in the crowd-streaming market. A record number of customers are paying to use Netflix. Analysts estimate the company added 1.8 million subscribers in Q2, a modest increase that would boost its paying subscribers to about 234.5 million. According to FactSet, analysts estimate Netflix's Q2 revenue increased by about 4% to $8.27 billion, and Macquarie said Wednesday’s results “could be even more impactful than usual,” given that the stock has rallied more than 50% since the start of the year.
A potential bearish factor for Netflix is the ongoing strike of Hollywood actors and writers. The Screen Actors Guild announced a walkout last week after failing to reach an agreement with the Alliance of Motion Picture and Television Producers, which also represents studios Netflix. Miller Tabak & Co said, “With a possible pause in new content becoming a problem, it’s tough to chase Netflix on a fundamental basis.” Also, Netflix’s lack of live sports to “provide automatic new content” could pose some problems.”
However, some analysts believe that the strike by actors and writers could ultimately be a bullish development for Netflix in the near term. Loop Capital Markets said the strike “should enhance Netflix’s competitive advantage given its level of unreleased content and its global production capabilities.” Concerning Wednesday’s Q2 earnings announcement, Wells Fargo Securities said, “We actually think investors would buy a pullback on the long-term outlook for Netflix” in the event of any weakness after Wednesday’s report.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
