Better Than Expected Q2 Sets Netflix Stock Up For A Rally

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Netflix (NASDAQ:NFLX) posted a better-than-expected set of Q2 2022 results, with earnings coming in at $3.20 per share, up 8% versus last year, driven by a stronger slate of content releases, including a new season of the flagship Stranger Things show. Netflix subscriber losses were also smaller than expected coming in at about 970,000, versus the company’s guidance of 2 million losses for the quarter. However, like most other U.S. multi-national companies, revenues were impacted by currency headwinds, with reported revenue growth standing at 9%, although it would have been about 13% in constant currency terms. The U.S. dollar has risen considerably this year (the dollar index is up 10% year-to-date), and this is likely to continue impacting Netflix, which derives about 60% of its revenue from overseas. Operating margins also saw some pressure, coming in at 19.8%, below the 21.5% forecast, and down from about 25% in the last quarter due to Netflix’s slower revenue growth and the currency pressures.

So what’s the outlook like for Netflix? For Q3, Netflix guidance is somewhat muted. The company expects that it could add 1 million subscribers over the quarter while projecting revenue of about $7.84 billion, which marks a growth of just about 4.7% year-over-year and a sequential decline. However, we think that things are likely to pick up going forward, as Netflix is looking to launch a lower-priced ad-supported plan in early 2023, partnering with Microsoft for ad technology. While ad subsidized plans will drive subscriber growth, tapping into more price-sensitive customers, Netflix is also confident about its monetization prospects, noting that it could be similar to, or even better than, non-ad, subscription-only plans. Separately, Netflix is also looking to crack down on password-sharing, testing an added fee in Latin America for users who share access outside their primary households.

Now, Netflix stock gained about 5.5% in Tuesday’s trading while rallying by almost 7.5% after-hours, as investors cheered the better-than-expected subscriber figures. However, even post the recent rally, Netflix stock remains down by close to 63% year-to-date (including Tuesday’s after-market rally). However, with Netflix stock priced at about $218 per share, it is trading at levels last seen around 2017 and 2018, prior to the global Covid-19 pandemic. However, Netflix has made considerable progress since then. For example, the company has roughly doubled its subscriber base since 2017, despite hiking prices four times over the period, with its churn rates still remaining the lowest in the streaming business. The stock now trades at just about 20x projected 2022 consensus earnings, down from levels of over 90x prior to the pandemic.  We remain positive on Netflix stock, with a price estimate of $317 per share, which is meaningfully ahead of the current market price.  See our analysis Netflix ValuationExpensive 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.

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With inflation rising and the Fed raising interest rates, Netflix has fallen 63% this year. Can it drop more? See how low can Netflix stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jul 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 NFLX Return 15% -63% 63%
 S&P 500 Return 4% -17% 76%
 Trefis Multi-Strategy Portfolio 7% -17% 227%

[1] Month-to-date and year-to-date as of 7/20/2022
[2] Cumulative total returns since the end of 2016

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