Netflix has had a successful year so far, with its stock rising by almost 38% compared to rival Disney’s 8% gain. The company is set to report its Q2 fiscal year 2024 results on July 18, with expectations of earnings of about $4.75 per share and revenues around $9.60 billion. Netflix’s growth is being driven by its ad-supported plans and crackdown on password sharing, which is expected to help expand its customer base. The company’s focus on boosting margins has also been successful, with operating margins increasing to 26.6% in Q2 from 22.3% in the same quarter last year.
Although Netflix’s stock has shown strong gains, with a 25% increase from early January 2021 to around $675 now, the company has faced inconsistent returns over the past few years. The stock underperformed the S&P 500 in 2021 and 2022, but outperformed in 2023. In comparison, the Trefis High Quality Portfolio, with 30 stocks, has consistently outperformed the S&P 500. Amid uncertainties in the macroeconomic environment, such as high oil prices and elevated interest rates, there are concerns about whether Netflix could face a similar situation as in 2021 and 2022 and underperform the S&P over the next 12 months.
While Netflix’s stock could move higher if it beats earnings, it is currently seen as overvalued, trading at almost 40x forward earnings. Slowing consumer spending growth and an uptick in the unemployment rate in the U.S. could impact player like Netflix, who rely on strong consumer confidence. The impact of accelerated subscriber ads from the crackdown on password sharing and ad-supported tiers is also expected to normalize, resulting in reduced momentum for Netflix’s stock. Trefis has a price estimate of $528 for Netflix, which is about 22% below the market price, highlighting the company’s overvaluation.
Netflix’s net additions are expected to be lower in Q2 due to typical seasonality, but the company continues to benefit from its ad-supported tier, which is attracting more price-sensitive customers with a $7 per month price in the U.S. The ad-supported plan had 40 million users as of mid-May 2024, up from 23 million in January, and contributed to 40% of all signups in markets where it is offered. The ad-supported plan is expected to generate more revenue per user than some ad-free plans, as incremental ad revenue offsets the discount offered on the ad tier.
Overall, Netflix’s performance in Q2 is expected to be strong, with earnings likely to exceed consensus estimates. The company’s focus on expanding its customer base through ad-supported plans and cracking down on password sharing is driving growth. However, concerns about the stock being overvalued and potential challenges in the macroeconomic environment could impact Netflix’s future performance. Investors will be closely watching the company’s Q2 results on July 18 to gauge its performance and outlook for the coming months.
