Should Investors Start Sinking Money into Netflix (NFLX) Before August Ends?

Video streaming giant Netflix, Inc. (NFLX) reported a second-quarter revenue of $8.19 billion, slightly below analyst expectations, but with earnings per share of $3.29, beating expectations.

Due to a crackdown on password sharing, the streaming giant added 5.90 million customers in the quarter. Also, the company expects a revenue boost in the second half of the year as it rolls out its ad-supported streaming tier and continues to address password sharing. However, the company noted that the full effect of these measures will take time to materialize.

Additionally, as the company is dealing with the potential impact of Hollywood writers' and actors' strikes, I think it might be best to wait for a more favorable point to enter the stock.

Moreover, the cost of popular streaming services like NFLX and Disney Plus, especially for ad-free subscriptions, has now surpassed the average price of traditional cable television, reaching $87 per month, according to an analysis by the Financial Times. While the rising prices should boost the media giants’ profit margins, these rising costs, coupled with a fragmented streaming landscape, have contributed to a surge in online piracy over the past year.

NFLX has gained 77.8% over the past year and 41.1% year-to-date to close the last trading session at $416.03. However, the stock is currently trading below its 50-day moving average of $431.16.

Here’s what could influence NFL X's performance in the upcoming months:

Updates in the Writers' Strike

The writers' strike is currently in its 118th day, and experts say the cost to the economy could amount to $4 billion. Recently, Hollywood studios, represented by the AMPTP, of which NFLX is a member, publicly disclosed their offer to striking writers, which included a significant 13% wage increase over three years, the highest in 35 years for the Writers Guild of America (WGA), and nearly 22% higher streaming residuals.

However, the WGA remains unsatisfied, describing the proposal as inadequate in protecting writers' interests and suggesting that the studios' intention was to pressure them into accepting.

The ongoing writers' strike could disrupt NFLX’s content production, leading to delays and gaps in their streaming library potentially causing subscriber dissatisfaction and churn. Moreover, higher production costs resulting from increased writer demands could affect NFLX's profitability.

Crackdown on Shared Passwords: Rise in Revenue

In the second fiscal quarter, NFLX put an end to shared passwords, a practice once seen as a sign of user loyalty. Despite a decline in signups from the previous record high in June, the platform's subscription numbers remained robust in the United States, confounding concerns of subscriber attrition on Wall Street.

In an increasingly competitive streaming landscape with numerous alternatives, retaining and luring subscribers has become a formidable challenge. Even though NFLX’s gross subscriber additions saw a 25.7% decrease in July compared to the preceding month's surge, the 2.6 million new subscribers in July still exceeded the average, suggesting that NFLX's efforts to address password sharing are resulting in revenue gains.

NFLX Ventures into Cloud Gaming: Tough Competition Ahead

NFLX is entering the cloud gaming arena, aiming to provide gaming access in Canada and the UK via beta testing on select devices. While cloud gaming offers accessibility on lower-end hardware, it's a competitive space. NFLX faces a challenge in winning over gamers with entrenched habits and preferences.

Robust Financials

During the fiscal second quarter, which ended June 30, 2023, NFLX’s revenues increased 2.7% year-over-year to $8.19 billion, while its operating income rose 15.8% from the year-ago value to $1.83 billion.

The company’s net income and EPS came in at $1.49 billion and $3.29, up 3.2% and 2.8% from the prior-year quarter, respectively.

Robust Profitability

NFLX’s trailing-12-month net income margin of 13.22% is 266.8% higher than the 3.60% industry average. Its trailing-12-month levered FCF margin of 55.60% is 549.4% higher than the 8.01% industry average.

Furthermore, NFLX’s trailing-12-month ROCE, ROTC, and ROTA of 20.26%, 9.27, and 8.36% are higher than the industry averages of 3.29%, 3.49%, and 1.55%, respectively.

Sky-High Valuation

In terms of forward non-GAAP P/E, NFLX is currently trading at 34.91x, 131.9% higher than the industry average of 15.06x. The stock’s forward EV/Sales of 5.74x is 221.8% higher than the industry average of 1.78x.

In addition, the stock’s forward P/B multiple of 7.80 is 299.6% higher than the industry average of 1.95.

POWR Ratings Reflect Uncertainty

NFLX has an overall C rating, equating to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NFLX has a B grade for Quality, in sync with higher-than-industry profitability.

In addition, the stock has a C grade for Stability, consistent with its 24-month beta of 1.73. However, NFLX has a D grade for Value, consistent with its higher valuation multiples than its industry peers.

NFLX is ranked #21 out of 59 stocks in the Internet industry.

Beyond what I have stated above, we have also given NFLX grades for Growth, Sentiment, and Momentum. Access NFLX’s POWR Ratings here.

Bottom Line

In the coming months, NFLX anticipates a revenue boost as it rolls out its ad-supported streaming tier and continues to address password sharing, though the full effects of these measures may require time to materialize. Moreover, the company plans to enter the already competitive cloud gaming sector.

In addition, the ongoing Hollywood writers' strike could disrupt NFLX’s content production and affect profitability.

Although NFLX’s robust financials and profitability suggest a potential for growth, the stock's elevated valuation raises concerns. Hence, waiting for a better entry point might be wise for investors to navigate the dynamic landscape of the industry.

Stocks to Consider Instead of Netflix, Inc. (NFLX)

Given its uncertain short-term prospects, the odds of NFLX outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) and B-rated (Buy) stocks from the Internet industry instead:

Yelp Inc. (YELP)

Travelzoo (TZOO)

Despegar.com, Corp. Ordinary Shares (DESP)

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NFLX shares were trading at $414.76 per share on Monday morning, down $1.27 (-0.31%). Year-to-date, NFLX has gained 40.65%, versus a 16.57% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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