Netflix (NFLX) stock has pulled back considerably over the past three months, falling almost 20% compared with a 2.7% decline in the S&P 500 index. While the shares are still up 20% year-to-date, besting the 13% rise in the S&P 500 index, investors aren’t seemingly as chipper as they once were about the company’s prospects.
The stock was up, at one point, 60% on a year-to-date basis. The pullback in Netflix has been part of the large-cap tech valuation concerns ignited by rising interest rates. The streaming pioneer is set to report third quarter fiscal 2023 earnings results after the closing bell Wednesday. Investors who are on the sidelines and have waited for a more attractive entry point can see whether this recent decline is a buying opportunity.
Currently trading at around $353 per share, Netflix still has potentially 30% returns based on its 12-month price target of $460. The company’s crackdown on password sharing, which should help boosts management's Q3 guidance for revenue and profits, is one of many reasons Netflix is poised to reach its consensus price target. UBS analyst John Hodulik expects Netflix to add 6.5 million paid subscribers during the quarter. That’s higher than prior estimates of 3.6 million.
Netflix is also operating more efficiently and is looking to capitalizing on existing 238 million global subscribers through ad-based plans. What’s more, the company is now consistently producing positive free cash flow which is slated to come in at $5 billion in 2023. This is driven by an expected one percentage point increase in the company's operating margin, among other fundamental improvement. All told, the company’s growth initiatives are paying huge dividends. This makes a compelling case to remain invested in Netflix stock ahead of next week's quarterly results.
For the quarter that ended September, Wall Street expects Netflix to earn $3.49 per share on revenue of $8.54 billion. This compares to the year-ago quarter when earnings were $3.10 per share on $7.84 billion in revenue. For the full year, ending December, Netflix’s earnings are projected to rise 19.19% year-over-year to $11.86 per share, while full-year revenue of $33.69 billion would mark an increase of 6.5% year-over-year.
Evidenced by the projected 10% rise in full-year revenue, the company’s growth initiatives, including implementing ways to crackdown on password sharing have begun to work. Netflix management had previously said, "We believe we have a clear path to reaccelerate our revenue growth: continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering.” Netflix's ability to leverage its first-mover advantage remains one of the key differentiators over the likes of Disney+ (DIS), Hulu or Warner Bros. Discovery's (WBD) Max and others.
In the second quarter, revenues rose 2.7% to $8.187 billion, falling a bit short of expectations for 4% growth. Operating income, however, surged more than 22% to $1.83 billion, driven by 22.3% rise in operating margin. During the quarter, the company added a net 5.89 million new subscribers, beating analyst expectations for additions of just over 2 million, bringing its global streaming paid memberships to 238.39 million, beating expectations for 234.5 million.
Regarding the ad-supported tier, the company said it will no longer provide its own forecasts of quarterly subscriber numbers because of diversifying the business into ads which was launched in twelve global markets in November. This, however, now exposes Netflix to an estimated $140 billion of brand advertising spending.
All told, now armed with over 238 million global subscribers and a strong value proposition among cord-cutters, Netflix remains a must-have product in the streaming space. Combined with its upcoming content launches, there is still a compelling case to remain invested in Netflix stock. These assumptions will be answered when Netflix issues its guidance forecast for the next quarter and full year.
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