Netflix Q3 Preview: Is NFLX Stock Overvalued Ahead of Earnings This Week?

The earnings season has started in earnest, with 40 companies in the S&P 500 Index ($SPX) reporting Q3 results so far, 80% of which have beaten consensus estimates. This week, streaming giant Netflix (NFLX) is scheduled to report its results for Q3 of 2024 on Thursday. So, let’s see what Wall Street expects from the tech giant in the September quarter. 

Netflix: Sales Are Forecast to Rise by 14.4%

According to consensus estimates, Netflix is forecast to report revenue of $9.77 billion and adjusted earnings per share (EPS) of $5.12 for Q3 of 2024. In the year-ago period, the streamer reported revenue of $8.54 billion and earnings per share of $5.12. So, while revenue growth is forecast at 14.4%, earnings are expected to expand by 37.3% year over year. 

Netflix has beaten earnings estimates in three of the last four quarters, driving the tech stock higher by almost 95% over the last 12 months. Despite its massive size, the company continues to grow, as paid memberships rose by 16.5% to 278 million in Q2. 

Notably, Netflix said that it would stop providing membership numbers or ARPU (average revenue per user) figures starting in 2025, as it will focus on revenue and operating margin as its primary financial metrics.

The company is looking to diversify its slate of content offerings, including forays into live sports - like its pact to stream NFL games on Christmas Day through 2026. 

Netflix co-CEO Ted Sarandos stated, “We’re in live [TV] because our members love it, and it drives a ton of engagement and a ton of excitement… and the good thing is advertisers like it for the exact same reason.” 

However, Netflix will still generate most of its revenue by creating original content for users to engage with. 

Will Netflix’s Ad Sales Will Drive Future Growth?

During its Q2 earnings call, Netflix reported strong growth in its ad business, as ad-supported memberships rose by 34% year over year, allowing the company to expand its subscriber base globally. 

Advertising is a crucial revenue stream for media companies, including Netflix. The stock has gained momentum in the past year as Netflix has successfully increased its user base due to a cheaper ad-supported tier while cracking down on password sharing. 

In fact, ad-supported subscribers accounted for close to 50% of signups in the markets where it was offered. However, Netflix emphasized that ad sales will not move the needle in terms of revenue growth until 2026. 

Netflix explained that it is on track to achieve its subscriber goals for 2025, and will focus on monetizing its advertising inventory, with management observing, “The near term challenge (and medium term opportunity) is that we’re scaling faster than our ability to monetize our growing ad inventory.” 

Is Netflix Stock Overvalued?

Wall Street is bullish, with a “moderate buy” consensus. Out of the 40 analysts covering Netflix stock, 23 recommend “strong buy,” two recommend “moderate buy,” 13 recommend “hold,” and two recommend “strong sell.” 

The average target price for NFLX stock is $720.61, which is only about 2.6% higher than the current trading price. 

Netflix is among the hottest stocks on Wall Street, and has surged a staggering 58,400% since its IPO (initial public offering) in May 2002. That means a $1,000 investment in NFLX stock soon after it went public would be worth close to $560,000 today. 

However, the mega-cap streaming giant continues to grow steadily, and is on track to increase revenue from $33.7 billion in 2023 to $43.4 billion in 2025, while adjusted earnings are forecast to expand from $12 per share to $23 per share. 

So, priced at 30x forward earnings, Netflix stock trades at a reasonable valuation, given earnings are forecast to expand by 26.4% annually through 2028. 

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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.