Is Netflix (NFLX) a Smart Buy Ahead of Its Q2 Earnings Report? – July 16, 2024

Netflix (NFLX – Free Report) is scheduled to release its second-quarter 2024 results on July 18.

Netflix forecasts revenue growth of 16% in the second quarter of 2024, which, when adjusted for currency neutrality (F/X), translates to growth of 21% due to price movements in Argentina and the devaluation of the local currency against the US dollar.

The company is forecasting total revenues of $9.491 billion, projecting year-over-year growth of 15.9%. The Zacks Consensus Estimate for revenues is $9.53 billion, beating the company’s expectations.

Netflix is forecasting earnings of $4.68 per share, up 42.2% year over year. The Zacks Consensus Estimate for the same is $4.70 per share, currently above the company’s expectations. This estimate has not changed in the past 30 days.

The company’s second-quarter results are expected to be driven by its diversified content portfolio, which involves significant investments in the production and distribution of local and foreign-language content.

NFLX estimated movement

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A History of Earnings Surprises

In the last reported quarter, the company delivered an earnings surprise of 17.07%. The company’s earnings topped the Zacks Consensus Estimate in three of the trailing four quarters and missed expectations in one. The average negative surprise was 9.29%.

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Whispers about earnings

Our proven model doesn’t predict Netflix’s earnings beat this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the probability of an earnings beat. That’s not the case here. You can discover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

NFLX currently has an Earnings ESP of 0.00% and a Zacks Rank of #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors Shaping Upcoming Results

Netflix expects a seasonal decline in net paid add-ons in Q2 2024 compared to Q1, while projecting year-over-year growth in global average revenue per subscriber (ARM) on a currency-adjusted basis.

The company’s strategic initiatives, including the introduction of affordable ad-supported plans and limiting password sharing through paid sharing options in over 100 countries (which accounts for over 80% of Netflix’s revenue), are expected to drive revenue growth in the second quarter.

These measures, combined with Netflix’s growing gaming offerings, including titles such as Grand Theft Auto: The Trilogy, are likely to drive higher user engagement and help grow its subscriber base in the reported quarter.

Despite these positive factors, Netflix still faces significant challenges in the highly competitive streaming landscape. The company faces strong rivals such as Disney‘S (NO – Free report) Disney+, Warner Bros. Discovery (WBD – Free report) – owner of HBO Max, Peacock, Paramount+, Apple‘S (AAPL – Free report) Apple TV+ and Amazon. In addition, Netflix competes for consumer attention with traditional linear TV, YouTube, short-form content platforms like TikTok, and the gaming industry. This intense competition for viewer time and subscription dollars remains a constant headwind for Netflix as it seeks to maintain its market position and drive growth in an increasingly crowded digital entertainment ecosystem.

Gross revenue growth estimates for Q2

The Zacks Consensus Estimate for total paid streaming subscribers is 5.41 million.

The consensus Asia Pacific revenue forecast for the second quarter of 2024 is $1.03 billion, up 12.9% from the figure reported in the same quarter a year earlier.

The Zacks Consensus Estimate for Latin America revenues is $1.18 billion, representing an increase of 9.9% from the prior-year quarter’s reported figure.

Additionally, the consensus revenue estimate for the EMEA region is $3.03 billion, up 18.5% from the figure reported in the year-ago quarter.

The Zacks Consensus Estimate for United States and Canada revenues is $4.26 billion, representing an increase of 18.4% from the figure reported in the same quarter a year earlier.

Price performance and pricing

Netflix shares have gained 38.4% in the year-to-date period compared with the Zacks Consumer Discussion Index, Apple, and Disney, which have risen 16.6%, 22%, and 7.3%, respectively. Warner Bros. Discovery shares have lost 38.4% in the same period.

Netflix outperforms its sector and competitors

Image Source: Zacks Investment Research

Now let’s take a look at the value Netflix offers investors at current levels. NFLX is currently trading at 6.85X forward-12-month sales, above the five-year median of 6.02X. Meanwhile, the Zacks Broadcasting industry’s earnings multiple is 4.43X. The company’s valuation seems a bit stretched compared to its own range and the industry average.

Selling Price (12 months ahead)

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Investment Considerations: Balancing Risk and Reward

Netflix presents a compelling investment opportunity as a dominant force in the global streaming industry. The company’s unparalleled content production capabilities consistently deliver hit shows and movies, driving subscriber growth and retention. Netflix’s strategic expansion into ad-supported and gaming tiers diversifies revenue streams while broadening its market reach. Restriction on password sharing aims to unlock significant untapped revenue potential. With a strong international presence and data-driven content creation, Netflix is well-positioned to capitalize on the growing global demand for streaming entertainment.

The company’s strong brand, innovative technology, and ability to adapt to market trends ensure its continued leadership in the evolving digital media landscape. As streaming becomes an increasingly central part of entertainment consumption worldwide, Netflix stands to benefit significantly by offering investors exposure to this rapidly growing sector. However, investors should monitor content costs, subscriber growth rates, and evolving competitive dynamics in the streaming industry.

Final thoughts

Despite its high valuation and fierce competition in the streaming sector, Netflix remains an attractive investment. Its first-mover advantage, extensive global reach, and history of producing culturally significant content set it apart. These factors, combined with Netflix’s ability to adapt and innovate, suggest it is well-positioned to maintain its market leadership and capitalize on the growing digital entertainment landscape, making the stock a worthwhile buy ahead of its second-quarter earnings report.