With a year-to-date gain of only around 27%, Netflix (NASDAQ:NFLX) has been the worst-performing FAANG stock in 2023. In 2022, it was the second worst performer among the elite group, and for a significant part of the year, it looked like it might have been the worst performer if not for the steeper decline in Meta Platforms (NASDAQ:META).
On the other hand, Meta’s stock has seen a remarkable turnaround in 2023. With a gain of 171% this year, it has become not only the best-performing FAANG stock but also the second-best-performing constituent of the S&P 500 Index ($SPX).
In contrast, Netflix’s poor performance has continued into 2023, with its shares underperforming the broader Nasdaq Composite ($NASX). This is despite the Nasdaq having its best first-half performance in four decades due to the rise in tech stocks.
Reasons Behind Netflix’s Stock Decline
Netflix’s stock has been on a downward trend due to concerns about its growth. Recently, it closed in the red even as the broader markets closed in the green. A Piper Sandler survey indicated that teens are spending more time on YouTube compared to Netflix, which is a negative trend for the streaming giant, especially since it’s losing popularity in comparison to YouTube, which offers free content (unless users opt for an ad-free version).
Furthermore, Netflix has experienced a series of top-level executive changes. It recently replaced its President of Advertising, Jeremi Gorman, with Amy Reinhard. There were also elevations within the company, with Elizabeth Stone being named Chief Technology Officer and Eunice Kim as Chief Product Officer.
Earlier in the year, co-founder and co-CEO Reed Hastings transitioned to the role of Executive Chairman, passing the reins to then-Chief Operating Officer Greg Peters.
Most significantly, Netflix is grappling with slowing growth. Its revenue, which the company now views as a better indicator of growth than the rise in subscribers, has only seen low single-digit increases for the past three quarters. It missed revenue estimates for both Q1 and Q2. Despite adding a respectable 5.9 million subscribers in Q2, the stock declined post-earnings due to growth concerns and a lack of specifics regarding its password crackdown and ad-supported tier during the earnings call.
Netflix also lost streaming subscribers in the first half of 2022, partly because of the pent-up demand over the previous two years during COVID-19 lockdowns. The company has nearly saturated developed markets and struggled to gain a foothold in some emerging, yet large, markets like India.
Given this structural growth slowdown, Netflix introduced an ad-supported tier, not only to attract new users with a lower-priced option but also to improve its average revenue per user. The company also began cracking down on password sharing, a practice it believes is widespread, with an estimated 100 million households sharing Netflix content.
While optimism over these strategies helped Netflix rebound from its 2022 lows, the lack of specific details on these initiatives in recent earnings calls has made markets nervous.
What to Expect from Netflix’s Q3 Earnings
Netflix will be the first of the FAANG companies to report Q3 earnings on October 18. Analysts anticipate a 7.7% YoY increase in revenues to $8.54 billion in the quarter, in line with Netflix’s forecast during the Q2 earnings call. Per-share earnings are also expected to rise by 12.6% YoY.
Netflix Stock: A Buy or Sell Ahead of Q3 Earnings?
The expectations for Netflix are relatively low as it approaches its Q3 earnings, which, combined with its year-to-date underperformance compared to other tech stocks, suggests that the stock has a favorable setup ahead of the report. However, buying Netflix stock at these prices might be a cause for caution due to its valuations.
Netflix’s stock is trading at a forward 12-month price-to-earnings multiple of 27.5x. While such multiples may have seemed attractive a couple of years ago, the structural slowdown in Netflix’s growth and the competition in the streaming industry may be influencing these elevated multiples.
It’s worth noting that Netflix still maintains a strong position in the streaming industry and has consistently posted profits and cash flows, unlike rivals like Disney (DIS) that struggle with ongoing losses. Nevertheless, as streaming is no longer the high-growth industry it once was and user-generated content platforms like YouTube and TikTok gain popularity, the streaming sector may experience a structural shift in valuations.
Regarding Netflix’s upcoming earnings, historical performance is not in its favor, as it has fallen after seven of its last ten earnings releases.
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