Netflix On A Roll As It Benefits From Paid Sharing And Ads. Is The Stock Undervalued At $610?

Netflix (NASDAQ:NFLX) stock has been a solid performer this year, rising by over 25% since early January, outperforming the Nasdaq-100, which gained about 10% over the same period. The stock is also up 2x over the past 12 months. There have been a lot of positive developments for Netflix of late.

Subscriber growth has been robust, as the company builds out on its ad-supported streaming offering while also cracking down on password sharing. Over Q4 2023, Netflix added 13 million new subscribers, beating Wall Street expectations, taking its total user base to a record 260.8 million paid subscribers. This is well ahead of the 7.7 million subscribers the company added in the year-ago period and roughly 9 million subscribers in Q3. The ad-supported tier is also gaining traction enabling the company to attract more price-sensitive customers. In January, Netflix indicated that the plan had a total of 23 million global users, up from about 15 million in November 2023. The plan appears to offer a solid value proposition for customers, priced at $7 per month in the U.S., offering full-high definition video quality, the same as Netflix’s ad-free Standard plan. Moreover,  the ad-supported plan is to bring in more revenue per user than the company’s Standard plan, as incremental ad revenue more than offsets the discount Netflix offers on the ad tier. Netflix began offering the paid sharing option in the U.S. last Spring enabling users to share their accounts with people outside of their households for an additional $8 per month. This move is also adding to Netflix’s top line, as users outside primary households pay for new subscriptions or pay the additional fee to share accounts.

Netflix is also getting more profitable. It increased its full-year operating margin forecast for 2024 to 24%, up from a range of 22% to 23%, as the company benefits from higher economies of scale from its larger subscriber base as well as better cost management. Netflix could continue to have a leg up over its rivals in the streaming space, given its wider customer base which allows it to invest more into content, unlike newer players such as Paramount, who have been scaling back on their content spending as investors look for improvements to profitability. The company has also been investing more into its gaming business, while also entering into live sports streaming, with a new deal with the WWE to bring its Raw program to the service. Netflix is also getting more confident about its value proposition, hiking prices for its basic and premium plans late last year. The premium plan, for instance, saw a price hike of close to 15%, and further hikes are expected in 2024.

Looking over a slightly longer period, NFLX stock has witnessed gains of 15% from levels of $540 in early January 2021 to around $610 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the increase 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 DIS, and even for the mega-cap 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 strong jump?

Despite the positive developments in recent months, we think Netflix stock looks slightly overvalued. At the current market price of about $610 per share, Netflix trades at roughly 35x forward earnings, which is a bit expensive in our view. There have been concerns about the broader macroeconomic picture, which could weigh on players such as Netflix who are dependent on growing consumer spending. Netflix could also see growth cool, as the impact of its password-sharing crackdown and ad-supported tiers is likely to eventually stabilize.  We have a $502 price estimate for Netflix, which is 18% 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] Returns as of 3/14/2024
[2] Cumulative total returns since the end of 2016

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