Netflix Earnings Preview: High Valuation, Extended Margins Make Stock a Risky Bet
Investing.com | Jan 23, 2024 03:14
- All eyes on Netflix ahead of quarterly earnings report today
- The streaming giant faces challenges with high valuation, extended margins
- Going into earnings, risks appear more tilted to the downside, although the company still has the potential to surprise
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- Revenues: 8.71 Billion (+11% VS Q4 2022)
- EBITDA: 1.41 Billion (+76.7% VS Q4 2022)
- EBIT: 1.22 Billion (+121% VS Q4 2022)
- EPS: 2.23 Usd (VS 0.12 Usd in Q4 2022)
As several companies gear up to share their quarterly earnings today, all eyes are on Netflix (NASDAQ:NFLX).
To understand how Netflix is positioned before the upcoming report, we're using our latest tool: ProTips .
Exclusive to InvestingPro subscribers , ProTips gives quick, straightforward info to simplify understanding an asset's history, helping you spot risks and trends without getting into complicated calculations.
Whether you're a beginner or an experienced trader, ProTips makes it easy.
So, when looking into a company, especially with earnings around the corner, it's smart to check out ProTips. In this article, we'll guide you through the process by evaluating the top-performing bank heading into earnings season.
h2 What's ProTips Saying About Netflix's Strengths and Weaknesses?/h2As seen in the image below, ProTips is warning investors about Netflix's high valuation as we approach earnings.
This has brought today's bar higher for the company, meaning that any slip could cause a potentially large drop.
As seen in the chart below from ProTips, the company's price-to-book is 9.6X of the competition.
Source: InvestingPro
Even worse so, Netflix's EV-to-EBIDTA is 34X higher than its peers.
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In fact, thanks to the extended EBIT and EBITDA margins, as well as the high price-to-earnings and price-to-book metrics (as shown by ProTips), markets are having to bank on robust figures in today's quarterly report. For instance:
Nonetheless, the company does retain a number of positive indicators, albeit fewer in comparison to the negative ones.
Looking at the data, most of the positive signs come from momentum indicators rather than fundamental factors. These indicators suggest that the company has managed to achieve good profitability despite challenges tied to economic slowdowns in key markets like Europe and China.
Besides just fundamental data, a lot of attention will be on changes in subscriptions. This will help investors understand whether the giant from Los Gatos, California, has benefited from the robust US economy and successfully adapted to various changes made in the past year, especially those related to shared account blocking.
h2 And How Much Is Netflix Really Worth?/h2Even with a mixed outlook on the fundamental side, the Fair Value estimated by InvestingPro aligns the stock's intrinsic value at just above $500, essentially in line with the current valuation.
In the event of a positive report, this suggests that the stock would likely remain consistent with valuations at that point. Additionally, this value is in harmony with the estimates of the average analysts covering the stock.
The less optimistic news for Netflix investors is that, barring a significantly positive surprise, the upside for the company's stock seems limited in the mid-term.
Source: InvestingPro
h2 Technical View/h2With that in mind, let's delve into the company's technical indicators to gain a clearer insight into how the charts might react to the earnings.
After a significant 75% drop from its peak during the market downturn from the beginning of 2021 to 2022, Netflix has staged a recovery, revisiting the $485 mark, where a crucial resistance level now stands.
In the scenario of a positive and well-received quarterly report by investors, breaking through this level and potentially targeting the $500 mark again should not be too challenging. Conversely, if the outcome is negative, there could be a regression toward the $422 mark.
Netflix has a history of making substantial moves following earnings reports.
In recent quarters, the trend has notably shifted. While 2021 and 2022 were characterized by negative reactions, the last year and a half has seen positive responses from investors in 4 out of 6 quarters.
Source: InvestingPro
Will history repeat itself today?
h2 Bottom Line/h2In my personal view, I see Netflix as a robust stock for the long term. I've traded it multiple times in the past, particularly during declines, with consistently favorable results. however, I find the current valuation unattractive, pointing to a greater downside than upside risk.
Given that the recovery and corporate strength appear to be already reflected in today's pricing, my advice for long-term investors would be to remain on the sidelines for this one.
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