Netflix Stock Q3 Preview: Will The Momentum Slow Down?

Netflix (NASDAQ:NFLX) stock has had a pretty good year, rising by almost 45% year-to-date as the company successfully navigated a brief subscriber decline post-Covid-19. This compares to rival Disney (NYSE:DIS), which has gained about 7% over the same time frame. Netflix is poised to report its Q3 FY’24 results on October 17, reporting on a quarter that is likely to see the company continue to expand its business led by its ad-supported plans and crack down on password sharing. We expect earnings to come in at about $5.10 per share, roughly in line with consensus estimates, and up by 37% compared to the last year. Revenues are likely to come in at about $9.85 billion, slightly ahead of consensus estimates, rising 14.5% compared to the last year. So what are some of the trends that could drive Netflix results?

Netflix is expected to see its paid net additions for the quarter lower on a year-over-year basis as the company sees a tough comparison with Q3 2023, which had the first full quarter impact from paid sharing. The password-sharing crackdown essentially forced customers to pay for users outside their households or sign up for a new account. However, the company should continue to benefit from its ad-supported tier which is enabling it to attract more price-sensitive customers with a price of just $7 per month in the U.S. The total subscribers on this tier grew by about 34% compared to the year-ago period. Moreover, the ad-supported plan is expected to generate more revenue per user than some of Netflix’s ad-free plans as incremental ad revenue more than offsets the discount offered on the ad tier. Over the last quarter, Netflix said that it was discontinuing its Basic ad-free plan while migrating users to its entry-level ad-supported plan, which offers better video quality and has a lower price point. That said, Netflix forecasts that its global average revenue per member will be roughly flat year over year in Q3 due to currency-related headwinds and potentially higher net adds in international markets where monthly pricing is lower than the U.S.

Netflix has been increasingly focusing on boosting its margins. For Q3, operating margins are guided at 28.1%%, marking an increase from about 22% in the year-ago quarter. The margin expansion is driven by revenue growth that outpaces operating costs due to economies of scale and also due to potentially lower content spending growth. Netflix’s continued price increases are also likely helping profitability.  Margins are also likely to trend higher on a sequential basis.

The increase in NFLX stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 11% in 2021, -51% in 2022, and 65% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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?

Although we think that Netflix stock could move slightly higher if it beats earnings, we believe the stock is overvalued. At the current market price of about $707 per share, Netflix trades at almost 37x forward earnings, which is a bit pricey in our view. While Netflix’s recent performance has been strong, consumer spending growth appears to be slowing down Moreover, things also remain mixed in the labor market, with the U.S. economy creating slightly fewer jobs than expected during August.  These trends could weigh on players such as Netflix who are dependent on strong consumer confidence. Netflix could also see subscriber growth cool, as the impact of its accelerated subscriber adds coming from the twin impact of the password-sharing crackdown and ad-supported tiers continue to normalize, reducing momentum for the stock.  We have a $572 price estimate for Netflix, which is about 20% 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.

While investors have their fingers crossed for a soft landing by the U.S. economy following the recent rate cuts, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/30/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios