Netflix (NASDAQ:NFLX) reported revenue, operating income and EPS beat last Thursday night, July 18th ’24, while guidance looked to be a little stronger on revenue and a little lighter on cash-flow for full-year ’24.
For Q2 ’24, Netflix revenue rose 17%, operating income rose 38% and EPS rose 48%, all YoY, with the only fly in the ointment being that Netflix now faces two tough comparisons vs. Q3 and Q4 ’23.
Morningstar’s analyst, Matt Dolgin, referred to NFLX’s Q2 ’24 as an “exquisite quarter” and boosted their fair value estimate to $500, which is about 20% below NFLX’s close on Friday, July 19th. Some sell-side price targets (from Briefing.com) are Canaccord Genuity at $650, Jefferies at $780, and Pivotal is currently at $800, but these targets all depend on your time horizon.
EPS and Revenue Estimate Revisions:
What struck me when pulling up the EPS estimates this weekend is the bump in 2024 EPS already following the Thursday night earnings release. Typically, analyst adjust their models right away, but that’s a $0.41 bump in ’24’s consensus EPS estimate (roughly 5% increase), so analysts are boosting EPS with conviction.
Part of the sell-side confidence might have come from another strong quarter of net new subscriber adds (8 million vs the roughly 6 million estimate), and the boost in revenue guidance to 17% in ’24 vs the previous 16% guide. (Per Pivotal, revenue is +22% y-o-y ex f/x.)
Netflix also boosted operating margin guidance to 26% in ’24 from 25% before. (Management has been throwing around 26% for a while now, since Q1 ’24 was 28%, but again, they may be guiding conservatively. Ultimately, I expect the operating margin to get over 30%, but that’s still a few years away.)
The free-cash-flow guide was $6 billion to start ’24, but it’s already at a $6.6 bl run rate for the first six months of ’24, so either free-cash-flow slows a little, or ’24 will be another decent year of free-cash-growth for Netflix.
One fly-in-the-ointment:
Coming into the summer, the Mike Tyson – Jake Paul fight was expected to happen in July ’24, which would have been another live event for Netflix, so if that can get done by September 30, it might help, but the big boost for Q4 ’24 will be the two NFL games on Christmas day, which could be a big boost for advertising, since Q4 ’23 is a tough compare, with 12% revenue growth and 150% growth in operating income to $1.5 billion.
Management seemed subdued about the back half of ’24, although the EPS bump for the ’24 means analysts really didn’t pay that much attention to the conference call notes.
The other not-so-confident commentary came from the advertising segment, which management said was still dealing with small numbers.
It’s not yet a line item on the income statement, and the time horizon seems to be ’27 and beyond, but streaming the two NFL games on Christmas Day might help to accelerate that (my words, not management.)
Technical Analysis: 
Until Netflix breaks out on higher volume, you have to respect this chart, and note the double-top or near double-top for NFLX this past few weeks, which implies that readers/investors might get another chance to own NFLX cheaper if the Q2 ’24 earnings releases see a sell-off in technology and growth stocks.
$700 is the critical resistance level for Netflix. Trade accordingly!
Valuation (Post Earnings):
In the earnings preview, a compare was done of Netflix’s valuation metrics, around the time of the stock’s low in the September – October ’21 time frame and then again before this earnings release.
This small table compares the key valuation metrics as of Q2 ’24 (financials updated as of Q2 ’24 compared to Sept ’21):
Note the dramatic improvement in cash flow and free cash flow per share, and price-to-sales.
Not shown because it’s an income statement item, Netflix operating margin improved from 23% to 26% over the same time frame.
Conclusion:
At this particular point in time, it’s not an easy environment for growth stocks, so readers can be patient to see how mega-cap tech and growth play out in the next few weeks (i.e. stock price reaction vs earnings results).
There’s no question Netflix had a solid Q2 ’24, and they are still innovating as the conference call notes noted that Netflix and YouTube (Google (NASDAQ:GOOGL) reports Tuesday night are now the “clear leaders” in the direct-to-consumer entertainment medium. Netflix also mentioned that they are getting into the “Games” or gaming market, which Netflix management estimated at $150 billion in size (ex-China and Russia) and that includes advertising. Netflix currently has 100 games “out” or released to subscribers per the conference call commentary.
The company continues to push forward into live events like the Tom Brady Roast (big hit for Netflix this quarter) the Paul v Tyson boxing match and the two NFL games.
The sell-side seems to have anointed Netflix as the clear and dominant winner of the streaming wars already but the company keeps pushing into other segments to drive revenue growth.
It’s interesting that Morningstar rates Netflix as a “narrow” moat despite the fact that free-cash-flow has grown from negative for most of the last decade to $6.9 billion as of December 31 ’23, but I’m sure that Morningstar would like to see some consistency around cash-flow and free-cash-flow as well.
For the past few years, Disney (NYSE:DIS) was thought to be the biggest threat to Netflix, but given what Disney’s CEO Bob Iger said recently, (discussed in the earnings preview for Netflix), it’s unlikely Disney will be able to close that substantial competitive gap.
Personally, I’d like to see Netflix trade down to $500 or the 200-week moving average at $450 to add some more of the stock, particularly if growth stocks correct over the next few weeks. The stop loss is at $440 or just below the 200-week moving average.
The plan for clients is to add small positions to client accounts on weakness, thanks to the substantial trading volatility around the stock. More stock would also be bought with a breakout in NFLX above $700 on heavy volume.
Netflix is still executing. The “live event” segment and advertising around it could be a substantial revenue driver for Netflix going forward.
Thanks for reading!
Disclaimer: Take all of this as an opinion and not a recommendation or advice. Past performance is no guarantee of future results. Investing can involve the loss of principal even for short periods of time. All EPS and revenue estimates are sourced from LSEG.com.