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Netflix Soars 40.5% YTD: Will Slowing User Growth Pull the Stock Down?
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Netflix (NFLX - Free Report) , the streaming giant, has seen its stock price surge an impressive 40.5% year to date, outpacing the broader Zacks Consumer Discretionary sector and many of its peers in the entertainment industry. This remarkable performance comes despite concerns about a slowdown in user growth, which has been a key metric for investors in recent years.
For third-quarter 2024, Netflix expects paid net additions to be lower than the year-ago period, which had the first full quarter impact from paid sharing. The company's ability to maintain its upward trajectory in the face of these headwinds has left many market observers questioning whether this rally is sustainable.
Year-to-date Performance
Image Source: Zacks Investment Research
Netflix Adapts to Overcome Growth Hurdles in Streaming
Netflix has implemented a multi-faceted strategy to maintain its market leadership through a combination of strategic initiatives despite concerns over slowing user growth. The company has doubled down on its investment in original content, producing hit shows and movies that have garnered critical acclaim and viewer loyalty. This focus on quality programming has helped Netflix differentiate itself in a crowded market and justify price increases to its existing subscriber base.
Netflix's foray into advertising-supported tiers has opened up new revenue streams and attracted price-sensitive consumers. This move has not only boosted subscriber numbers but also diversified the company's income sources, potentially leading to more stable and predictable earnings in the future.
Additionally, Netflix has been expanding aggressively into international markets, where there is still significant room for growth. The company has invested heavily in local content production in key regions such as India, South Korea and various European countries. This strategy has paid off, with international subscribers now accounting for the majority of Netflix's user base and driving much of its recent growth.
Netflix is bringing a variety of thrilling new Danish stories to its members with the upcoming new series The Legend (working title), the film Mango and the unscripted project Christopher – A Beautiful REAL Life (working title). Netflix has also shared more news from the Danish slate, including the cast for the upcoming character-driven crime series The Habitat (working title) and the first look of the upcoming film Maybe Baby ll that will premiere later this year.
In Indonesia, Netflix is diversifying its original content with a variety of genres. The upcoming film, Abadi Nan Jaya, is set to premiere in 2025. In the Philippines, NFLX is set to release Outside, a psychological thriller directed by Carlo Ledesma, on Oct 11, 2024. Netflix is set to release 10 titles in Thai in the rest of 2024, including Doctor Climax, which is set in the late '70s. NFLX is also expanding its gaming and animated series offerings. Exploding Kittens promises humor with a plot involving God and the Antichrist trapped in cat bodies. Terminator Zero, set to premiere on Aug. 29, reimagines the classic Terminator saga in an animated format.
The Zacks Consensus Estimate for paid total streaming net membership additions in 2024 is pegged at 29.8 million. The consensus mark for total paid subscribers at the end of 2024 is pegged at 290.4 million, indicating 11.6% growth year over year.
The company has also been exploring new revenue streams beyond its core subscription model. Netflix has ventured into mobile gaming, merchandise licensing, and even limited theatrical releases for some of its films. While these initiatives are still in their early stages, they represent potential avenues for future growth and diversification of revenues.
For 2024, NFLX expects healthy revenue growth of 14-15% based on F/X rates at the end of the second quarter of 2024, up from 13-15% reported previously. The updated revenue forecast indicates solid membership growth trends and business momentum. Netflix is building an in-house ad tech platform that will be tested in Canada this year and launched more broadly in 2025.
The Zacks Consensus Estimate for revenues is pegged at $38.68 billion, indicating 14.7% growth year over year. The consensus mark for earnings is pegged at $19.08 per share, indicating 58.6% growth year over year.
Image Source: Zacks Investment Research
The company now expects full-year 2024 operating margin to be 26% (based on F/X rates as of Jan. 1, 2024), up from the prior forecast of 25%, due to an improved revenue outlook and ongoing expense discipline.
Challenges Persist for NFLX
Netflix contends with robust rivals such as Disney’s (DIS - Free Report) Disney+, Warner Bros. Discovery (WBD - Free Report) -owned HBO Max, Peacock, Paramount+, Apple’s (AAPL - Free Report) Apple TV+ and Amazon, potentially putting pressure on Netflix's growth and profit margins. Additionally, Netflix competes for consumer attention against traditional linear TV, YouTube, short-form content platforms like TikTok and the gaming industry. The company's ability to maintain its leadership position in this crowded field will be critical to its long-term success.
From a financial perspective, the recent surge in Netflix's stock price has led to expanded valuation multiples, potentially limiting future upside for investors. The company's forward 12-month sales multiple of 7.04 exceeds its five-year median of 6.2, indicating that the stock may be trading at a premium to its historical valuation. Moreover, this multiple surpasses the Zacks Broadcast Radio and Television industry's forward earnings multiple of 4.72, suggesting that Netflix's valuation is stretched relative to its peers.
Price-to-Sales (Forward 12 Months)
Image Source: Zacks Investment Research
Final Thoughts
While Netflix's stock has surged impressively, its ability to maintain this momentum hinges on successfully navigating the challenges of slowing user growth through content innovation, international expansion, and revenue diversification strategies. Netflix’s strong position in the streaming market suggest that it may be premature to abandon the ship. New investors should wait for a better entry point for Netflix, which currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Netflix Soars 40.5% YTD: Will Slowing User Growth Pull the Stock Down?
Netflix (NFLX - Free Report) , the streaming giant, has seen its stock price surge an impressive 40.5% year to date, outpacing the broader Zacks Consumer Discretionary sector and many of its peers in the entertainment industry. This remarkable performance comes despite concerns about a slowdown in user growth, which has been a key metric for investors in recent years.
For third-quarter 2024, Netflix expects paid net additions to be lower than the year-ago period, which had the first full quarter impact from paid sharing. The company's ability to maintain its upward trajectory in the face of these headwinds has left many market observers questioning whether this rally is sustainable.
Year-to-date Performance
Image Source: Zacks Investment Research
Netflix Adapts to Overcome Growth Hurdles in Streaming
Netflix has implemented a multi-faceted strategy to maintain its market leadership through a combination of strategic initiatives despite concerns over slowing user growth. The company has doubled down on its investment in original content, producing hit shows and movies that have garnered critical acclaim and viewer loyalty. This focus on quality programming has helped Netflix differentiate itself in a crowded market and justify price increases to its existing subscriber base.
Netflix's foray into advertising-supported tiers has opened up new revenue streams and attracted price-sensitive consumers. This move has not only boosted subscriber numbers but also diversified the company's income sources, potentially leading to more stable and predictable earnings in the future.
Additionally, Netflix has been expanding aggressively into international markets, where there is still significant room for growth. The company has invested heavily in local content production in key regions such as India, South Korea and various European countries. This strategy has paid off, with international subscribers now accounting for the majority of Netflix's user base and driving much of its recent growth.
Netflix is bringing a variety of thrilling new Danish stories to its members with the upcoming new series The Legend (working title), the film Mango and the unscripted project Christopher – A Beautiful REAL Life (working title). Netflix has also shared more news from the Danish slate, including the cast for the upcoming character-driven crime series The Habitat (working title) and the first look of the upcoming film Maybe Baby ll that will premiere later this year.
In Indonesia, Netflix is diversifying its original content with a variety of genres. The upcoming film, Abadi Nan Jaya, is set to premiere in 2025. In the Philippines, NFLX is set to release Outside, a psychological thriller directed by Carlo Ledesma, on Oct 11, 2024. Netflix is set to release 10 titles in Thai in the rest of 2024, including Doctor Climax, which is set in the late '70s. NFLX is also expanding its gaming and animated series offerings. Exploding Kittens promises humor with a plot involving God and the Antichrist trapped in cat bodies. Terminator Zero, set to premiere on Aug. 29, reimagines the classic Terminator saga in an animated format.
The Zacks Consensus Estimate for paid total streaming net membership additions in 2024 is pegged at 29.8 million. The consensus mark for total paid subscribers at the end of 2024 is pegged at 290.4 million, indicating 11.6% growth year over year.
The company has also been exploring new revenue streams beyond its core subscription model. Netflix has ventured into mobile gaming, merchandise licensing, and even limited theatrical releases for some of its films. While these initiatives are still in their early stages, they represent potential avenues for future growth and diversification of revenues.
For 2024, NFLX expects healthy revenue growth of 14-15% based on F/X rates at the end of the second quarter of 2024, up from 13-15% reported previously. The updated revenue forecast indicates solid membership growth trends and business momentum. Netflix is building an in-house ad tech platform that will be tested in Canada this year and launched more broadly in 2025.
The Zacks Consensus Estimate for revenues is pegged at $38.68 billion, indicating 14.7% growth year over year. The consensus mark for earnings is pegged at $19.08 per share, indicating 58.6% growth year over year.
Image Source: Zacks Investment Research
The company now expects full-year 2024 operating margin to be 26% (based on F/X rates as of Jan. 1, 2024), up from the prior forecast of 25%, due to an improved revenue outlook and ongoing expense discipline.
Challenges Persist for NFLX
Netflix contends with robust rivals such as Disney’s (DIS - Free Report) Disney+, Warner Bros. Discovery (WBD - Free Report) -owned HBO Max, Peacock, Paramount+, Apple’s (AAPL - Free Report) Apple TV+ and Amazon, potentially putting pressure on Netflix's growth and profit margins. Additionally, Netflix competes for consumer attention against traditional linear TV, YouTube, short-form content platforms like TikTok and the gaming industry. The company's ability to maintain its leadership position in this crowded field will be critical to its long-term success.
From a financial perspective, the recent surge in Netflix's stock price has led to expanded valuation multiples, potentially limiting future upside for investors. The company's forward 12-month sales multiple of 7.04 exceeds its five-year median of 6.2, indicating that the stock may be trading at a premium to its historical valuation. Moreover, this multiple surpasses the Zacks Broadcast Radio and Television industry's forward earnings multiple of 4.72, suggesting that Netflix's valuation is stretched relative to its peers.
Price-to-Sales (Forward 12 Months)
Image Source: Zacks Investment Research
Final Thoughts
While Netflix's stock has surged impressively, its ability to maintain this momentum hinges on successfully navigating the challenges of slowing user growth through content innovation, international expansion, and revenue diversification strategies. Netflix’s strong position in the streaming market suggest that it may be premature to abandon the ship. New investors should wait for a better entry point for Netflix, which currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.