The stock market had a terrible year in 2022 as interest rates rose quickly and fears of a recession occurred. But since the beginning of 2023, investor sentiment has become optimistic Nasdaq Composite index increased by 50% as of this writing.
But there is one company whose shares have outperformed this tech-heavy benchmark, rising 96% over the same period. The company is Netflix (NASDAQ: NFLX) – Is it time to buy this? Streaming stocks?
Press fast forward
Netflix recently reported financial results for the first three months of 2024. Revenue and diluted earnings per share totaled $9.4 billion and $5.28, respectively. Sales rose 15% year over year, while profits jumped 83%. These headlines crushed Wall Street estimates, and the report caps an impressive run of strong financial performances from the streaming market leader.
Looking forward, management expects revenue to grow between 13% and 15% in 2024. And executives raised their forecast on the profitability front, looking ahead to the full year operating margin The forecast is said to be an excellent 25%, which is an increase from the previous forecast of 24%.
Netflix added 9.3 million net new subscribers in the first quarter, bringing its total to 269.6 million. This performance was driven by the tremendous success of the cheaper ad-supported tier, where signups increased 65% quarter-over-quarter. The company also does a good job of converting users who previously shared passwords into paid accounts.
One might think that the stock is trending higher following these positive results, but that is not the case. As of this writing, shares of Netflix have fallen more than 5% since its earnings release on April 18, and there’s likely a reason for that decline.
Management said it will stop reporting quarterly subscriber numbers starting next year. “We will also announce key subscriber milestones as we reach them,” the current shareholder letter states. Wall Street hates uncertainty and anything that suggests a lack of complete transparency. And there are fears that this decision could be due to Netflix’s inability to attract new subscribers in the future, particularly due to market saturation and fierce competition.
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The decision to stop reporting subscriber numbers is not ideal, but management will provide other guidance focused on revenue and profitability as well as subscriber engagement trends. This is what Netflix also wants to make shareholders a priority.
When it comes to engagement, Netflix has a huge opportunity ahead of it. Although the company has been a leader in the streaming industry since the service launched in the US in 2007, it commands less than 10% of the total TV time in that country. It’s the same in every market where Netflix is available.
With a huge content budget, coupled with an established core competency in creating popular content, engagement can steadily increase over time. Higher viewership also provides ample opportunity for Netflix’s advertising business to gain momentum.
Take the rating into account
Netflix shares have been on an all-time high lately and are therefore not as cheap as they were in summer 2022. The stock is currently trading at a forward price-to-earnings ratio (P/E) of 32. This represents a 20% premium over that Nasdaq-100 Index, the may be too expensive for some investors.
But it’s easy for Netflix bulls to appreciate the company’s dominant industry position and top-notch financials. Netflix can continue to grow its profits at an impressive rate in the coming years as its business continues to grow. That’s a good reason to buy the stock.
Should you invest $1,000 in Netflix now?
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
1 Unstoppable Stock Rise of 72% in Last 12 Months: Time to Buy? was originally published by The Motley Fool