NFLX Earnings Preview: What to watch
Netflix (NFLX) is set to release its Q2 '24 financial results after the market closes on Thursday, July 18, '24. The Street consensus is anticipating the following:
- Revenue: $9.53 billion, reflecting a 16% year-over-year growth.
- Operating Income: $2.43 billion, representing a 33% year-over-year increase.
- EPS: $4.72, indicating a 43% year-over-year growth.
In recent quarters, Netflix has consistently surpassed expectations, particularly with subscriber growth. For instance, in Q1 '24, the company added 9.3 million new subscribers, significantly beating the expected 4.8 million. Similarly, in Q4 '23, Netflix added 13.12 million new subscribers compared to the 8.8 million anticipated by analysts.
Additionally, Netflix's advertising segment has been a standout performer, growing at an impressive 65-70% sequential rate each quarter. Specifically, advertising grew by 70% in the first two quarters and 65% in the third quarter of the last year, highlighting the rapid development of this business niche within the company's model.
For Q2 '24, Netflix's management provided revenue guidance that aligns with consensus expectations but suggested a slightly lower operating margin compared to Q1 '24's 28%.
Looking ahead, Netflix has guided for 13-15% revenue growth for the full year of '24, which is slightly conservative compared to the current consensus estimate of 15%. This cautious outlook reflects the company's strategic approach amid its impressive performance metrics and evolving business landscape.
Key Themes Analysts Will Be Watching:
1. Subscriber Growth: Despite no longer reporting subscriber and ARPU metrics, analysts will be keenly watching for any indications of subscriber trends. In Q1 '24, Netflix added 9.3 million new subscribers, significantly surpassing the 4.8 million expected. Similarly, in Q4 '23, the company added 13.12 million new subscribers versus the 8.8 million anticipated. This strong subscriber growth has been a critical driver of Netflix's recent success.
2. Advertising Revenue: Netflix's burgeoning advertising segment has been a standout performer, growing sequentially at 65-70% over the past three quarters. Analysts will be looking for continued strong performance in this area, as it represents a key growth driver for the company's revenue diversification strategy.
3. Content Spending and Quality: With significant investments in content, analysts will be assessing how these expenditures translate into subscriber retention and new sign-ups. The quality and reception of Netflix's original content will also be under scrutiny, as this remains a cornerstone of its competitive advantage.
4. Free Cash Flow and Capital Allocation: Since mid-'22, Netflix's cash flow and free cash flow have seen dramatic improvements, with trailing twelve-month (TTM) cash flow at $7.3 billion and TTM free cash flow at $6.9 billion. Analysts will be evaluating how effectively Netflix is managing its capital, particularly in terms of content investment versus free cash flow generation.
5. Valuation Metrics: At $656 per share, Netflix trades at 36 times its '24 EPS of $18.43, with a P/E of 29 times earnings for an expected 31% growth rate through '26. Its price-to-cash flow and free cash flow multiples are in line with its P/E at 33x and 35x, respectively. This favorable valuation, especially compared to its peak in November '21, will be a point of interest for analysts assessing its long-term growth potential.
6. Geopolitical and Market Conditions: Analysts will also consider broader market conditions and geopolitical factors that could impact Netflix's performance. This includes potential regulatory changes and competition from other streaming services.
7. Operational Efficiency: With Q1 '24's operating margin at 28%, any commentary on cost management and operational efficiency will be closely watched. Analysts will be particularly interested in Netflix's ability to balance content spending with profitability.
As Netflix prepares to release its Q2 '24 earnings, these key themes will provide critical insights into its current performance and future growth trajectory. With robust subscriber growth, a rapidly growing advertising segment, and improved cash flow metrics, Netflix remains a compelling story in the technology and media landscape.
Valuation:
Netflix, at $656 per share, trades at 36x its '24 EPS of $18.43, with a 43% expected EPS growth this year. The stock trades at 29x earnings for an anticipated 31% growth rate through '26, and revenue growth is projected at 15% in '24, averaging 13% over the next three years. Its price-to-cash flow and free cash flow multiples align with its P/E at 33x and 35x, respectively.
Since mid-'22, cash flow and free cash flow have significantly improved, with TTM cash flow at $7.3 billion and TTM FCF at $6.9 billion. Compared to its peak valuation in November '21, Netflix's current valuation has become more favorable, with a TTM P/E dropping from 58x to 41x and a forward P/E from 59x to 36x. TTM cash flow and FCF have drastically increased, showcasing stronger earnings quality.
Morningstar's fair value estimate for NFLX is $440, close to its 200-week moving average of $447-450.