What happens when you stop password sharing after getting enough people addicted to your content? You end up gaining 16M new users. That is a solid jump in subscribers – a record for Netflix. The initial knee-jerk reaction to the news was to send NFLX sock higher. Since then, however, NFLX stock – along with a slew of other tech stocks – has started to sell off of its recent euphoria highs. The problem is that these revenue gains are already printed. Moving forward, how does Netflix grow from here? And, given the current economic landscape, what are comparative investment alternatives?
This is what the broader market is looking at across the board. Ultra-low interest rates are no longer the norm and low-yield stock levels are no longer acceptable. Given this environment, and despite the big surge in revenue increase for Netflix, the yield for NFLX stock is still too low on a comparative basis. All stocks are adjusting to a higher interest rate environment. This will mean that despite the big move higher in revenue from the increase in subscribers, what you get after squeezing out profits is not enough to merit a higher stock price.
Revenue growth for Netflix continues on a general uptrend as seen in the chart above. This is one of the important key aspects for value investing that a value investor is looking for. What will happen in the future given the latest information? Basically, showing that continuous increases in revenue – all else equals, will translate into continued revenue increase. Netflix continues to add more and mores subscribers and the passwordgate has allowed for increases in revenue. Maybe Netflix should have done this long ago.
In the meantime, analysts also expect further increases in revenues.
Projected revenues for 2024 are going to be about $4.5B more. This is ~13.3% increase in revenue – far above the normal S&P 500 increase for revenue. And, for 2025, analysts continue to see increases of an additional $4.2B more, an overall increase, but a decline in growth. Nonetheless, if Netflix can continue to increase its revenues this would translate in to a value investor seeing more and more growth with their holdings.
Margins are strong and well above the norm for the overall economy as the S&P 500 prints ~8.25% net margins. In that regard, Netflix outperforms the broader economy across the board. This means that what money does come in to Netflix in the form of revenue, Netflix keeps a bigger portion versus other companies. With high margins, this also shows that Netflix continues to have pricing power over its products.
Projected Earnings Per Share
Earnings per share are expected to grow continuously with the new revenue increases and higher margins. In 2024, EPS are expected to come in at $15.81. However, if the economy does enter in to recession in the future, what will this entail for future revenues and earnings? Something such as a video service subscription would be considered discretionary spending that may get curtailed on some level. But, it is only ~$.750 – $20.00 monthly. Still, for some families this could add up to $240.00 annually and if the economy contracts too much, cuts to spending may start here. While I would expect that Netflix will mostly hit its mark with earnings, there may be a cut to the total, if but a small amount.
NFLX stock has seen some ups and downs. The big selloff in late 2021 and all through the early part of 2022 was well warranted. As a value investment, Netflix would provide continued, growing earnings for a shareholder. And, while there was hyper-growth and speculation with NFLX stock prior to the end of 2021, prudent investment principles prevailed – NFLX sold off heavily from $700.00 down to $180.00 in very short order.
Now, at $400.00 share price, what does a prospective investor get out of this kind of investment in NFLX? Not enough.
My expectation is that interest rates are going to remain high for a long time and just maybe they move higher. Given that, an investment in a 10-Year US Treasury would yield 4.876% at the time of this writing. The Federal Reserve may have to raise interest rates an additional 25 bp, 50 bp, or as much as 75 bp as we see current economic forces dictating. Because of that, the yield on the 10 year would go slightly higher, but likely not much higher. Eventually, the Fed will likely be able to drop rates somewhat in order to get the economy moving again after a slight contraction.
Because of the inverse relationship to yield, price would go back up on the 10 Year US Treasury Note. So, an investment in the 10-Year has only a small amount of risk involved in it. Whereas an investment in Netflix at these prices would yield below the 10-year rate as the $15.81 projected EPS is a mere 3.91% of the current NFLX price. There should be premium over the alternative investment versus the risk taken for investing in NFLX. With the 10 year yielding such a high return and relative low risk, the price of NFLX stock would need to bake in to its price versus projected EPS a premium. It is not. Price must adjust for NFLX stock.
Once there is a premium available to an investor that warrants the added risk of owning NFLX stock, this is a stock that would be a valuable holding for long term. For now, sell NFLX, or at the very least buy puts and get ready to see more downside.