Netflix, Inc. (NFLX), one of the world’s leading entertainment services companies, is set to report its third quarter 2023 financial results on Wednesday, October 18, 2023, after the market’s close. Analysts expect the company’s revenue and EPS for the third quarter (ended September 2023) to increase 7.7% and 12.1% year-over-year to $8.54 billion and $3.48, respectively.

However, NFLX has missed the consensus revenue estimates in three of the trailing four quarters.

By May, Netflix’s password-sharing crackdown rolled out in the U.S. and more than 100 other countries. The streaming service giant alerted members about its new sharing policy, stating that Netflix accounts should only be shared within a single household. Earlier this year, NFLX outlined password-sharing guidance in four selected countries: New Zealand, Canada, Portugal, and Spain.

The company has tightened its guidelines on password sharing to boost revenue and subscriber numbers.

In addition, in July, the company removed its cheapest commercial basic ad-free plan in the U.S. and the United Kingdom to get more sign-ups for its recently launched ad-supported option. This move leaves Netflix’s standard with ads plan, priced at $6.99 a month, as its cheapest option.

With these multiple revenue initiatives, especially the advertising business, likely to take time to mature, NFLX’s CFO Spencer Neumann recently warned of softer margins and said that the company expects full-year 2023 operating margins, which peaked at 21%, to be just in the range of 18%-20%.

For the third quarter of 2023, the company forecasts revenue of $8.50 billion, up 7% year-over-year. Its revenue growth in the third quarter will come from growth in average paid memberships. NFLX expects its operating income for the to-be-reported quarter to be $1.90 billion and an operating margin of 22% compared with 19% in the prior year’s quarter.

NFLX also reportedly plans to raise the prices of its ad-free service after the ongoing Hollywood actors’ strike ends. This move might hamper the company’s growth.

Last week, Wolfe Research analyst Peter Supino downgraded Netflix stock to Peer Perform from Outperform amid fears that the potential rewards of the company’s revenue initiatives, like paid sharing and an ad tier, won’t outweigh the risks surrounding its future growth. The analyst also removed his $500 price target on the stock.

He added that the two biggest drivers for the company’s multiple over the medium term, net subscriber additions and operating margins, “look increasingly risky” amid planned price increases, the password sharing crackdown, and CFO Spencer Neumann’s recent cautious commentary.

NFLX’s stock has plunged 9.1% over the past month to close the last trading session at $360.82. However, the stock has gained 47.2% over the past year.

Here’s what could influence NFLX’s performance in the upcoming months:

Solid Financials  

NFLX’s revenue increased 2.7% year-over-year to $8.19 billion for the second quarter ended June 30, 2023. Its operating income grew 15.8% from the year-ago value to $1.83 billion. The company’s net income came in at $1.49 billion, an increase of 3.3% from the previous year’s quarter.

Furthermore, the company’s earnings per share rose 2.8% year-over-year to $3.29. Also, net cash provided by operating activities was $1.44 billion, compared to $103 million in the prior year’s period.

Favorable Analyst Estimates

Analysts expect NFLX’s revenue to increase 6.6% year-over-year to $33.72 billion for the fiscal year ending December 2023. The consensus earnings per share estimate of $11.85 for the ongoing year indicates a 19.1% year-over-year rise.

For the fiscal year 2024, the company’s revenue and EPS are expected to grow 13% and 27.2% year-over-year to $38.08 billion and $15.07, respectively.

Mixed Profitability

NFLX’s trailing-12-month EBIT margin and net income margin of 17.51% and 13.22% are 110.4% and 283.1% higher than the respective industry averages of 8.32% and 3.45%. Moreover, the stock’s trailing-12-month ROCE and ROTC of 20.26% and 9.27% favorably compared to the industry averages of 3.21% and 3.35%, respectively.

However, NFLX’s trailing-12-month gross profit margin of 38.77% is 21.5% lower than the industry average of 49.37%. Its trailing-13-month CAPEX/Sales of 1.12% is 71.4% lower than the industry average of 3.92%.

Mixed Valuation

In terms of trailing-12-month Non-GAAP PEG, NFLX is currently trading at 1.48x, 2.6% lower than the industry average of 1.52x. However, the stock’s forward EV/Sales and Price/Sales of 5.04x and 4.77x are 187.1% and 339.5% higher than the industry average of 1.76x and 1.08x, respectively.

In addition, the stock’s forward Price/Book of 6.63x is 235.1% higher than the 1.98x industry average. Its 32.98x forward Price/Cash Flow is 271.5% lower than the 8.88x industry average.

POWR Ratings Reflect Uncertainty

NFLX’s mixed prospects are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a C grade for Value, consistent with its mixed valuation.

In addition, NFLX has a C grade for Stability, justified by its 24-month beta of 1.76.

Within the Internet industry, NFLX is ranked #26 out of 59 stocks.

Beyond what I have stated above, we have also given NFLX grades for Quality, Sentiment, Growth, and Momentum. Get all NFLX’s POWR Ratings here.

Bottom Line  

While NFLX is expected to report year-over-year gains in revenue and earnings for the third quarter of 2023, its revenue could miss analysts’ estimates. The company’s subscriber additions and operating margins look risky this year amid planned price increases, the widespread password-sharing crackdown, and CFO Spencer Neumann’s recent cautious commentary.

Given its stretched valuation, elevated volatility, and bleak near-term outlook, it seems prudent to hold NFLX and wait for a better entry point in this internet stock.

Stocks to Consider Instead of Netflix, Inc. (NFLX)

Given its uncertain short-term prospects, the odds of NFLX outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated stocks from the Internet industry instead:

Booking Holdings Inc. (BKNG)

eBay Inc. (EBAY)

Yelp Inc. (YELP)

To explore more A and B-rated internet stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

NFLX shares were trading at $358.34 per share on Tuesday morning, down $2.48 (-0.69%). Year-to-date, NFLX has gained 21.52%, versus a 15.04% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

More...