The video streaming video giant Netflix, Inc. (NFLX) has seen an exponential increase in its subscription base in recent years, and its stock has gained 22.3% over the past year. But its stock price has declined 5% year-to-date, due to a slowdown in growth after a COVID-19-pandemic driven boom last year and a lighter content slate in the first half of this year because of production delays.
In the second half of this year, however, new seasons of NFLX’s biggest and most popular shows and an exciting movie lineup should allow the stock to regain its momentum.
With more people replacing their traditional cable services with streaming services to reduce costs and access more varied content, we believe Netflix’s stock is poised for a turnaround. Here is what we think could shape NFLX’s performance in the near term:
Increased Precedence of Streaming Platforms
Video streaming platforms have gained immense popularity recently, due largely to affordable data plans and tailored streaming content that aligns with consumers’ preferences. In fact, the global video streaming market is expected to grow at a 12% CAGR between 2020 – 2027. The coronavirus pandemic has propelled more people to use online streaming services in response as part of new stay-at-home trends. Furthermore, the increased penetration of smart devices and the advent of digitalization have added impetus to the streaming market.
Shelter-at-home mandates amid the pandemic have led to substantial growth in NFLX’s user base. In fact, as more people drop cable services to switch to streaming video platforms, NFLX, which remains synonymous with on-demand entertainment, is uniquely positioned to regain its stride.
Bullish Analyst Sentiment
A $3.15 consensus EPS estimate for NFLX for the current quarter, ending June 2021, represents a 98.1% improvement year-over-year. Moreover, its EPS is expected to rise 73.5% in the current year, and 23% next year.
Analysts expect NFLX’s revenues to rise 20.3% year-over-year to $7.32 billion in the current quarter, and 17.4% to $7.49 billion in the next quarter. Also, the Street expects its revenues to be $29.72 billion in 2021, up 18.9% from the same period last year.
Impressive Growth and Profitability
NFLX’s revenue increased 24.2% year-over-year to $7.16 billion in the first quarter ended March 31, 2021. Its operating income grew 104.6% from the year-ago value to $1.96 billion, while its net income increased 140.8% year-over-year to $1.71 billion. The company’s EPS rose 138.9% from the prior-year quarter to $3.75. Also, NFLX’s global streaming paid membership increased to 13.6% year-over-year to 207.64 million.
NFLX’s 21.2% trailing-12-month EBIT margin is 115.2% higher than the 9.8% industry average. Its net income margin and levered free cash flow margin of 14.2% and 51.3%, respectively, are significantly higher than the 2.8% and 11% respective industry averages. In addition, the company’s trailing-12-month ROE, ROA and ROTC of 35.3%, 9.4% and 12.6%, respectively, compare favorably with industry averages.
Consensus Rating and Price Target Reflect Potential Upside
Of the 38 Wall Street analysts that have rated NFLX, 14 rated it a Strong Buy and 20 rated it Buy. The stock has a 1.51 average broker rating, which indicates favorable analyst sentiment. Also, analysts expect the stock to hit $609.95 soon, indicating a potential 18.8% upside.
POWR Ratings Reflect Promising Outlook
NFLX has a B overall rating of B, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. NFLX has a B Sentiment Grade, consistent with analysts’ expectations that its revenue and earnings will grow.
Also, in terms of Quality Grade, NFLX has a B. The company’s high profitability is in sync with this grade.
Click here to see the additional POWR Ratings for NFLX (Value, Stability, Growth, and Momentum).
The stock is ranked #9 of 71 stocks in the Internet industry.
If you’re looking for other top-rated stocks in the same industry, with an Overall POWR Rating of A or B, you can access them here.
NFLX’s paid membership growth is expected to accelerate in the near term as the company ramps up production and releases new content. Because its popular shows are expected to attract more subscribers, investors and analysts remain optimistic about the stock’s growth prospects. So, we believe the stock is poised for a rebound
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NFLX shares were trading at $510.80 per share on Monday morning, down $2.67 (-0.52%). Year-to-date, NFLX has declined -5.54%, versus a 12.51% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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