Up 50% Over Last Year, Will Q4 Earnings Drive Netflix Stock Higher?

Netflix (NASDAQ:NFLX) is slated to report its Q4 2023 results on January 23. We estimate that Netflix’s revenue will come in at a little over $8.75 billion for the quarter, marginally ahead of the consensus estimates and the company’s guidance of $8.69 billion.  This would also mark year-over-year growth of roughly 11%. We estimate that earnings will stand at $2.22 per share, also roughly in line with the consensus. So what are some of the trends that are likely to drive Netflix earnings for the quarter? See our interactive dashboard analysis on Netflix Earnings Preview for more details on how Netflix’s revenues and earnings are likely to trend for the quarter.

Netflix began rolling out restrictions on password sharing in the U.S. and over 100 other countries in May 2023, requiring users to pay an additional monthly fee (about $8 in the U.S.)  to share accounts with users outside of their households. The move appears to have gotten off to a strong start, with Netflix adding 5.9 million subscribers over Q2 and 8.76 million subscribers in Q3. Netflix has also indicated that sign-ups exceeded cancellations – an indication that the password-sharing crackdown was overall working in its favor. Netflix is also getting more confident about its value proposition, hiking prices for its basic and premium plans in October.

Separately, the company’s ad-supported plan could also potentially start playing a bigger role in the context of Netflix’s overall business. Over Q3, Netflix said that its ad-supported plan membership grew nearly 70% quarter over quarter, although it didn’t provide specific figures. The average revenue per membership for its ad-supported plan has exceeded its standard plan, accounting for both subscription fees and advertising revenues.

Looking over a slightly longer period, NFLX stock has seen a decline of 10% from levels of $540 in early January 2021 to around $475 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the decrease in NFLX stock has been far from consistent. Returns for the stock were 11% in 2021, -51% in 2022, and 65% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that NFLX underperformed the S&P in 2021 and 2022.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Communication Services sector including GOOG, META, and TMUS, and even for the megacap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NFLX face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

Although we think that Netflix stock could move slightly higher if it beats earnings, we believe the stock is slightly overvalued at current levels of about $474 per share. The streaming wars are heating up and mounting competition could impact the company’s overall growth in the long run. Moreover, concerns about the broader macroeconomic picture could also weigh on players such as Netflix who are dependent on growing consumer spending. We have a $$410 price estimate for Netflix, which is 14% below the market price. See our analysis Netflix Valuation: Expensive or Cheap for more details on what’s driving our price estimate for Netflix. Also, check out the analysis of Netflix Revenue for more details on how Netflix revenues are trending.

[1] Month-to-date and year-to-date as of 1/7/2024
[2] Cumulative total returns since the end of 2016

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