Netflix NFLX released its earnings report for the first quarter on April 18. Here’s Morningstar’s take on how investors should assess Netflix’s earnings, the company’s long-term prospects, and Netflix stock.
Key Morningstar metrics for Netflix
Fair value estimation for Netflix
Based on the 3-star rating, we believe Netflix stock is fairly valued compared to our fair value estimate.
Our updated fair value estimate of $315 per share assumes Netflix’s domestic paid streaming subscriber base will increase only modestly to 76 million in 2027. Price elasticity plays an important role in our estimates. In general, we are skeptical of the claim that price increases will not impact global customer numbers. Our domestic subscriber and price forecast will generate 6% compound annual revenue growth between 2023 and 2027 as Netflix benefits from price increases every 18 months. We expect that higher revenue from fighting password sharing will be offset somewhat by increased churn, and that the cheaper ad-supported plan in the US will largely pull subscribers away from the traditional base plan. We expect management to continue investing in content and marketing, which will weigh on overall margin growth. Overall, we’re forecasting average revenue growth for Netflix of 9%, with operating margin expanding from 21% in 2021 to 25% in 2027 after declining to 18% in 2022.
Learn more about Netflix fair value estimation.
What we thought of Netflix’s Q1 results
- We would describe the returns as mixed. The company delayed some monetization initiatives like paid sharing until Q2, and subscriber growth was subdued. The subscriber forecast for the second quarter, similar to the first quarter, was disappointing for the bulls.
- We have a 3-star rating on the stock and think earnings will match that. Competition in the US remains fierce and subscriber growth will be challenging. Similar problems exist in the Asia-Pacific region. While the company didn’t announce subscriber numbers for the new ad-supported plan, comments on pricing per subscriber have been encouraging and provide a boost for bulls.
Economic Moat Rating
We give Netflix a narrow moat rating. Netflix is the largest subscription video-on-demand provider in the US and is rapidly expanding internationally. This new content not only strengthens relationships with its current customers, but also attracts new customers through word of mouth and the halo effect of critical acclaim and award nominations. Through its streaming video delivery method, Netflix tracks every customer interaction, from large (total time spent on Netflix) to minute (whether a user pressed fast forward). The average Netflix user worldwide now watches more than 90 minutes of video a day. Netflix uses this dataset in its offerings in a variety of ways to achieve lasting competitive advantages. To improve customer experience, Netflix analyzes traffic, video performance, and buffering to better understand where data loss and slowdown are occurring and route traffic accordingly. Netflix also uses its cloud database to help with content creation and sourcing, and to power its content discovery engine.
Read more about Netflix’s moat rating.
risk and uncertainty
The move to relying on original content has brought additional costs and risks. Netflix today relies heavily on its ability to continually find and create compelling new original programming on relatively tight schedules. If that pipeline falters, subscribers could churn to the competition. Netflix’s expansion outside the US could continue to weigh on margins due to different tastes and lower prices. Increasing the subscription price in mature markets could limit growth and increase churn. While the introduction of ads could help Netflix attract price-sensitive consumers and boost their sales, the new offering could also dilute the company’s brand equity among users. By offering services in almost every major country except China, Netflix is subject to numerous regulatory stipulations regarding content restrictions, content production, and taxation.
Read more about the risks and uncertainties of Netflix.
Say the NFLX bulls
- Netflix’s internal recommendation software and large subscriber base give the company an edge in deciding what content to purchase for years to come.
- Netflix has built an extensive content library that will benefit the company over the long term.
- The international expansion offers attractive markets for new subscribers.
NFLX Bears say
- The company continues to burn billions of dollars to create its original content, with no end in sight.
- Competition in the US and internationally is increasing and will continue to increase in the near future. Disney+ launched its own SVOD service in the second half of 2019.
- The need for higher content and marketing spend outside of the US will limit margin expansion in the international segment.
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