Streaming giant Netflix, Inc. (NFLX - Get Rating) had ignored password sharing for many years. However, the company expanded its crackdown on password sharing to 103 countries and territories, alerting users that their accounts cannot be shared for free outside their households. It also stated that an extra fee of $8 per month would be charged for shared passwords in the United States.

The streaming giant suffered a significant loss of subscribers and a short-term financial hit as a result of the password-sharing crackdown. However, the company remains confident that the paid-sharing plan is a sound long-term strategy. In the first quarter of 2023, NFLX added 1.75 million streaming subscribers, which fell short of the analyst estimate of 2.06 million additions.

On the other hand, its average paid memberships increased 4% year over year, while the paid net adds amounted to 1.75 million for the first quarter versus a negative 0.2 million in the year-ago quarter.

On top of it, NFLX revealed that its ad-supported tier garnered five million active users globally, with sign-ups having more than doubled since early this year. The company noted that more than a quarter of new signups opt for the ad-supported plan in countries where it is offered.

The stock has gained 84.7% over the past nine months and 145.3% over the year to close the last trading session at $441.44, higher than its 50-day and 200-day moving averages of $377.85 and $321.49, respectively.

Here’s what could influence NFLX’s performance in the upcoming months:

Mixed Financials

For the first quarter of fiscal 2023, which ended March 31, 2023, NFLX’s revenues increased 3.7% year-over-year to $8.16 billion. Its non-GAAP free cash flow improved 164% from the year-ago value to $2.12 billion.

However, the company’s operating income declined 13.1% year-over-year to $1.71 billion. Also, its net income and EPS decreased by 18.3% and 18.4% from the prior year’s quarter to $1.31 billion and $2.88, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, NFLX is trading at 39.23x, 162% higher than the industry average of 14.97x. The stock’s forward EV/Sales of 6.04x is 228.2% higher than the industry average of 1.84x. Likewise, its forward EV/EBITDA multiple of 28.19 is 230% higher than the industry average of 8.54.

In addition, NFLX’s forward Price/Sales of 5.77x is 389.7% higher than the industry average of 1.18x. Its forward Price/Cash Flow multiple of 48 is considerably higher than the industry average of 8.74.

Mixed Analyst Estimates

Analysts expect NFLX’s revenue for the fiscal second quarter (ended June 30, 2023) to increase 3.7% year-over-year to $8.26 billion. However, the consensus earnings per share estimate of $2.85 for the about-to-be-reported quarter indicates a decline of 11% year-over-year.

In addition, the company’s revenue and EPS for fiscal year 2023 are expected to grow 7.5% and 13.1% year-over-year to $33.99 billion and $11.25, respectively.

Robust Profitability

NFLX’s trailing-12-month levered FCF margin of 54.48% is 641.3% higher than the 7.35% industry average. Its trailing-12-month net income margin of 13.16% is 368.2% higher than the 2.81% industry average. Also, the stock’s trailing-12-month EBIT margin of 16.85% is 96.9% higher than the industry average of 8.56%.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 21.33%, 9.13%, and 8.49% are considerably higher than the industry averages of 3.29%, 3.83%, and 1.48%, respectively.

POWR Ratings Reflect Uncertainty

NFLX’s POWR Ratings reflect this prospect. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NFLX has a B grade for Quality, in sync with higher-than-industry profitability.

In addition, the stock has a C grade for Sentiment, consistent with its mixed analyst estimates. On the other hand, NFLX has a D grade for Value, justified by its higher valuation relative to its industry peers.

NFLX is ranked #29 out of 57 stocks in the D-rated Internet industry. Get all NFLX’s POWR Ratings here.

Bottom Line

NFLX has maintained a strong momentum despite the uncertain macroeconomic conditions based on its fundamental strength. As the streaming video pioneer faces signs of market saturation, it is exploring new ways to generate revenue, such as cracking down on password sharing and launching an ad-supported service.

However, such strategic moves aimed at boosting cash generation will likely take a toll on its subscriber growth in the short term. Given NFLX’s financial performance and high valuation, it could be wise for investors to wait for a better entry point in this stock.

How Does Netflix, Inc. (NFLX) Stack Up Against Its Peers?

While NFLX has an overall POWR Ratings grade of C, equating to Neutral, one could also check out other stocks within the Internet industry that are overall A (Strong Buy) rated: trivago N.V. (TRVG - Get Rating), Travelzoo (TZOO - Get Rating) and Yelp Inc. (YELP - Get Rating).

What To Do Next?

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NFLX shares were trading at $441.61 per share on Wednesday afternoon, up $0.17 (+0.04%). Year-to-date, NFLX has gained 49.76%, versus a 16.79% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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