Netflix Faces High Stakes Ahead of Earnings Report
Investors are looking for a repeat of last year’s success as Netflix (NASDAQ: NFLX) prepares to release its third-quarter earnings. The popular streaming service has nearly doubled its share price over the past year, although it has gained about 45% so far in 2024. The stock surged by 35% in late 2023, largely propelled by a strong third-quarter performance then.
High Hopes for Upcoming Earnings
Netflix’s guidance from mid-July provided mixed signals. The streaming giant projected a revenue increase of 14% to $9.7 billion for the September quarter, down from a 17% year-over-year growth seen in the previous quarter. Nevertheless, the company expects its profit margins to improve, predicting net income to rise by 33% to $2.7 billion, or $5.10 a share. Recent analyst forecasts suggest an even higher profit expectation of $5.12 per share on nearly $9.8 billion in revenue.
With the stock appreciating by 98% over the past year, the context changes. From a valuation perspective, Netflix trades at 37 times this year’s earnings. Investors, however, may regret not capitalizing on lower prices last year when valuations hovered in the high teens. If earnings continue to grow despite modest revenue increases, the stock’s rally may well continue.
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Shifting Strategies at Netflix
Netflix continues to innovate. Two years ago, the company launched a less expensive ad-supported streaming plan. Last year, it took measures against password sharing. Additionally, Netflix has adopted a new strategy of staggering the release of popular show episodes. For example, viewers of Love Is Blind learned they would have to wait a week for the season finale.
Starting in 2025, Netflix will also stop reporting subscriber counts. The shift in focus aims to highlight revenue growth, particularly as ad revenue from lower-priced plans starts to come in. Moreover, as families begin paying an additional $7.99 monthly fee for remote account users, the clarity of subscriber numbers will likely diminish. This transformation reflects a broader change in the company’s business model.
The market has reacted cautiously to Netflix’s evolving strategies, as evidenced by positive stock trends. Recently, analysts have been optimistic, with at least five raising their price targets ahead of Netflix’s earnings report, with increases ranging from $40 to $100 over previous estimates.
With all eyes on its performance, Netflix will need to deliver strong results to meet these inflated expectations.
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Rick Munarriz has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
The views expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
