Netflix shares opened lower on Wednesday after its third-quarter report beat on revenue and earnings, but the outlook for the next quarter disappointed. Revenue rose 11.8% to $12.87 billion and earnings climbed 44% to $0.87 per share, yet Netflix guided fourth-quarter revenue up 11.5% to $13.4 billion and net income up just 15% to $0.67 per share, below the $0.73 analysts expected. Earlier this month, Netflix cut 6% of its workforce, and several executives, including its chief content officer and head of film, left the company. The stock hit a two-year low after losing almost half its value over the past year, and the author notes it trades at less than 17 times forward earnings while value investors debate whether it is a value trap.
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Netflix shares are down 31% year-to-date, including a 6% drop after the latest earnings report, as viewing hours rose only 2% in the first half and its viewer share fell from 8.8% to 7.8% in the year ending July, according to Nielsen. Still, third-quarter revenue rose 11.8% to $12.9 billion and EPS increased from $0.59 to $0.87, partly due to lower content spending from timing factors. The article argues Netflix is outgrowing rivals such as Disney, Skydance and Comcast, which face declining legacy businesses, yet its valuation is not higher than theirs. Analysts expect revenue to grow 11.2% to $56.9 billion in 2027, and the author contends the stock is oversold and has rebounded from similar downturns before.
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The author, who has followed Netflix (NFLX) for 24 years, notes the stock has fallen more than 40% over the past year after a long run of gains. Netflix's trailing revenue is now over $48 billion at a record net margin, compared with $153 million in revenue when it went public in 2002. The stock trades at under 20 times this year's projected earnings, under 19 times next year's and 15 times the year after, and guidance calls for 11.7% third-quarter revenue growth. The author argues the valuation looks compelling for a premium business with pricing flexibility and that the current pullback is milder than the 2011 Qwikster and 2022 sell-offs. Results are due after the market closes on Wednesday, which could change the valuation math.
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Netflix reports third-quarter results next week, and its shares have fallen 40% over the past year as momentum and expectations both remain low. The company's own guidance calls for revenue growth of 11.7%, its weakest in three years, and revenue growth is expected to slow for a third consecutive quarter. The author notes the stock has fallen after each of its last five quarterly reports, with an early spring rally as the main exception. The article also points out that Netflix has recovered from past plunges, including an 83% drop after the Qwikster fiasco in 2011 and a 77% peak-to-trough fall in 2022 that it made back within two years. The author finds the recent chart troubling, but says the longer-term record is more encouraging.
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