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Should Investors Buy Netflix Stock With Crucial Q4 Earnings Approaching?
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Netflix (NFLX - Free Report) shares have been on quite a rally leading up to the company’s fourth-quarter earnings report on January 19. In fact, Netflix shares are up 13% over the last month, to easily outpace the S&P 500 and Nasdaq.
This leaves many wondering if the rally can continue post-earnings and if it’s time to buy Netflix stock with shares still 38% from their highs.
Q4 Preview
Beating quarterly expectations, especially on the bottom line, along with positive guidance and strong subscriber figures has led to strong price movement in Netflix shares in the past. The Zacks Expected Surprise Prediction (ESP) is an insightful feature to help figure out the possibility of a company beating earnings estimates.
The Zacks Consensus for Netflix’s Q4 earnings is $0.51 a share with the Most Accurate Estimate at $0.42 per share. This unfortunately gives Netflix an ESP of -17.11% and indicates the company could miss earnings estimates for its fiscal fourth quarter.
Image Source: Zacks Investment Research
Netflix earnings are expected to be down -61% year over year compared to EPS of $1.33 a share in Q4 2021 as the company adjusts to the broader economic challenges. This is closely associated with operating costs, as top-line sales are expected to be up 1% from the prior year quarter at $7.84 billion.
Advertising & Subscribers
Wall Street will be paying special attention to the insight and outlook that Netflix can provide on the company’s expansion of its paid-ad service which it offers at a cheaper monthly subscription amount of $6.99.
The company’s venture into using its platform to create adverting revenue could be lucrative long-term and help combat increased competition from Disney (DIS - Free Report) which has become one of its primary streaming competitors.
With the paid-ad subscription service recently launched in October, the company’s results and updates on rumored news that it missed 20% of its ad targets will be heavily monitored after this led to much volatility in Netflix stock before its more recent rebound.
Image Source: Zacks Investment Research
Still, many analysts believe Netflix’s advertising segment could bring in billions of additional revenue in the years to come and the company will need to address the rumblings that advertisers reportedly asked the company to return some of the money already paid for advertising slots.
Overall, Netflix is expected to have added 4.5 million paid subscribers during Q4, bringing its total paid memberships to 227.6 million. This is significant as Netflix’s price movement has historically been based on subscriber growth and Q4 would almost double the 2.4 million subscribers added during Q3 after the company lost subscribers for the first time in over a decade during Q1 and Q2 of its current fiscal year 2022.
Performance & Valuation
Netflix stock is still down -37% over the last year, to underperform the S&P 500’s -13%. This has also trailed the Nasdaq’s -23% and slightly lagged its rival Disney’s -34%. However, over the last decade, Netflix’s +1230% has crushed broader indexes and Disney’s +82%.
Image Source: Zacks Investment Research
Last year’s drop and Netflix’s historical performance are reasons for investors to be optimistic about a continued recovery in 2023 and beyond. On that note, monitoring Netflix’s valuation will be important going forward, especially after big rallies to the upside.
At current levels of around $326 a share, Netflix has a forward P/E of 30.9X. This is much higher than the industry average of 15.1X but Netflix has been the leader in its space. Plus, Netflix stock trades well below its own decade high of 513.4X and at a 71% discount to the median of 108X.
When dividing the P/E ratio by Netflix’s growth rate we can see that its PEG of 3.5 is still close to the decade median of 3.3. Netflix’s PEG is higher than the industry average of 1.5 but nicely beneath its decade-long high of 23.6.
Image Source: Zacks Investment Research
Growth Outlook
Netflix earnings are now expected to be down -8% for fiscal 2022 but rebound and rise 2% in FY23 at $10.53 a share. Earnings estimate revisions have trended up for FY22 but declined for FY23 over the last 90 days.
On the top line, sales are forecasted to be up 6% for FY22 and jump another 7% in FY23 to $33.94 billion. Fiscal 2023 would represent 68% growth from pre-pandemic levels with 2019 sales at $20.15 billion.
Image Source: Zacks Investment Research
Bottom Line
Netflix currently lands a Zacks Rank #3 (Hold) going into its fourth-quarter earnings release. Despite the sharp rally in Netflix stock leading up to its quarterly report the company’s valuation is still attractive relative to its past. While an earnings beat looks unlikely, better-than-expected guidance particularly surrounding its advertising business along with continued subscriber growth could certainly lead to more upside in the stock.
There could be some short-term weakness in Netflix stock if the company is not able to provide this optimism in its outlook but patient investors may be rewarded for holding on to shares at their current levels.
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Should Investors Buy Netflix Stock With Crucial Q4 Earnings Approaching?
Netflix (NFLX - Free Report) shares have been on quite a rally leading up to the company’s fourth-quarter earnings report on January 19. In fact, Netflix shares are up 13% over the last month, to easily outpace the S&P 500 and Nasdaq.
This leaves many wondering if the rally can continue post-earnings and if it’s time to buy Netflix stock with shares still 38% from their highs.
Q4 Preview
Beating quarterly expectations, especially on the bottom line, along with positive guidance and strong subscriber figures has led to strong price movement in Netflix shares in the past. The Zacks Expected Surprise Prediction (ESP) is an insightful feature to help figure out the possibility of a company beating earnings estimates.
The Zacks Consensus for Netflix’s Q4 earnings is $0.51 a share with the Most Accurate Estimate at $0.42 per share. This unfortunately gives Netflix an ESP of -17.11% and indicates the company could miss earnings estimates for its fiscal fourth quarter.
Image Source: Zacks Investment Research
Netflix earnings are expected to be down -61% year over year compared to EPS of $1.33 a share in Q4 2021 as the company adjusts to the broader economic challenges. This is closely associated with operating costs, as top-line sales are expected to be up 1% from the prior year quarter at $7.84 billion.
Advertising & Subscribers
Wall Street will be paying special attention to the insight and outlook that Netflix can provide on the company’s expansion of its paid-ad service which it offers at a cheaper monthly subscription amount of $6.99.
The company’s venture into using its platform to create adverting revenue could be lucrative long-term and help combat increased competition from Disney (DIS - Free Report) which has become one of its primary streaming competitors.
With the paid-ad subscription service recently launched in October, the company’s results and updates on rumored news that it missed 20% of its ad targets will be heavily monitored after this led to much volatility in Netflix stock before its more recent rebound.
Image Source: Zacks Investment Research
Still, many analysts believe Netflix’s advertising segment could bring in billions of additional revenue in the years to come and the company will need to address the rumblings that advertisers reportedly asked the company to return some of the money already paid for advertising slots.
Overall, Netflix is expected to have added 4.5 million paid subscribers during Q4, bringing its total paid memberships to 227.6 million. This is significant as Netflix’s price movement has historically been based on subscriber growth and Q4 would almost double the 2.4 million subscribers added during Q3 after the company lost subscribers for the first time in over a decade during Q1 and Q2 of its current fiscal year 2022.
Performance & Valuation
Netflix stock is still down -37% over the last year, to underperform the S&P 500’s -13%. This has also trailed the Nasdaq’s -23% and slightly lagged its rival Disney’s -34%. However, over the last decade, Netflix’s +1230% has crushed broader indexes and Disney’s +82%.
Image Source: Zacks Investment Research
Last year’s drop and Netflix’s historical performance are reasons for investors to be optimistic about a continued recovery in 2023 and beyond. On that note, monitoring Netflix’s valuation will be important going forward, especially after big rallies to the upside.
At current levels of around $326 a share, Netflix has a forward P/E of 30.9X. This is much higher than the industry average of 15.1X but Netflix has been the leader in its space. Plus, Netflix stock trades well below its own decade high of 513.4X and at a 71% discount to the median of 108X.
When dividing the P/E ratio by Netflix’s growth rate we can see that its PEG of 3.5 is still close to the decade median of 3.3. Netflix’s PEG is higher than the industry average of 1.5 but nicely beneath its decade-long high of 23.6.
Image Source: Zacks Investment Research
Growth Outlook
Netflix earnings are now expected to be down -8% for fiscal 2022 but rebound and rise 2% in FY23 at $10.53 a share. Earnings estimate revisions have trended up for FY22 but declined for FY23 over the last 90 days.
On the top line, sales are forecasted to be up 6% for FY22 and jump another 7% in FY23 to $33.94 billion. Fiscal 2023 would represent 68% growth from pre-pandemic levels with 2019 sales at $20.15 billion.
Image Source: Zacks Investment Research
Bottom Line
Netflix currently lands a Zacks Rank #3 (Hold) going into its fourth-quarter earnings release. Despite the sharp rally in Netflix stock leading up to its quarterly report the company’s valuation is still attractive relative to its past. While an earnings beat looks unlikely, better-than-expected guidance particularly surrounding its advertising business along with continued subscriber growth could certainly lead to more upside in the stock.
There could be some short-term weakness in Netflix stock if the company is not able to provide this optimism in its outlook but patient investors may be rewarded for holding on to shares at their current levels.