Netflix Inc. (NFLX - Get Rating) in Los Gatos, Calif., offers TV series, documentaries, feature films, and mobile games across various genres and languages. It recently announced that it had entered a combination agreement to acquire Next Games to expand its internal game studio capabilities. However, the company posted disappointing results, losing 200,000 customers in the first quarter and projecting its subscribers will shrink by another 2 million customers in the second quarter.

The stock has declined 43.9% in price over the past month and 68.8% over the past six months to close yesterday’s trading session at $209.91. In addition, it is currently trading 70.1% below its 52-week high of $700.99, which it hit on Nov. 17, 2021. 

Furthermore, stiff competition, the impact of account sharing, increasing inflation, and the Russia-Ukraine war make the company’s near-term outlook uncertain.

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

Top Line Growth Does Not Translate into Bottom Line Improvement

For its fiscal first quarter, ended March 31, 2022, NFLX’s revenue surged 9.8% year-over-year to $7.87 billion. The company’s operating income increased 0.6% year-over-year to $1.97 billion. However, its net income came in at $1.60 billion, representing a 6.4% year-over-year decrease. Also, its EPS was $3.53, down 5.9% year-over-year.

Low Profitability

In terms of trailing-12-month CAPEX/Sales, NFLX’s 1.86% is 56.3% lower than the 4.25% industry average. Also, its 41.62% trailing-12-month gross profit margin is 18.1% lower than the 50.83% industry average.

Stretched Valuation

In terms of forward P/CF, NFLX’s 84.48x is 758.9% higher than the 9.84x industry average. And its 4.70x forward P/B  is 109.7% higher than the 2.24x industry average. Furthermore, the stock’s forward P/S and EV/EBITDA of 2.88x and 14.97x, respectively, are higher than the 1.51x and 8.61x industry averages.

POWR Ratings Do not Indicate Enough Upside

NFLX has an overall C rating, which equates to a Neutral in our POWR Ratings 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 C grade for Value, which is in sync with its higher-than-industry valuation ratios.

In addition, NFLX has a C grade for Growth and Sentiment. This is justified because analysts expect its EPS to decrease 12.2% in the next quarter and 3.1% in the current year.

NFLX is ranked #20  of 72 stocks in the F-rated Internet industry. Click here to access NFLX’s Momentum, Quality, and Stability ratings.

Bottom Line

NFLX is currently trading below its 50-day and 200-day moving averages of $357.98 and $519.41, respectively, indicating a downtrend. Moreover, it could continue declining  in the near term due to concerns over multi-household account sharing and increased competition. So, the stock looks overvalued at its current price level, and we think it could be wise to wait for a better entry point in the stock.

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

While NFLX has an overall POWR Rating of C, one might want to consider investing in the following Internet stocks with an A (Strong Buy) or B (Buy) rating: trivago N.V. (TRVG - Get Rating), Yelp Inc. (YELP - Get Rating), and Travelzoo (TZOO - Get Rating).

Note that TRVG is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.

NFLX shares were trading at $199.95 per share on Tuesday afternoon, down $9.96 (-4.74%). Year-to-date, NFLX has declined -66.81%, versus a -11.80% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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