Netflix Stock (NASDAQ:NFLX)
Netflix, Inc. (NASDAQ:NFLX) is one of the world’s top streaming corporations. NFLX stock price has just recovered to levels not seen since late-2021. This has increased its market capitalization to about $200 billion. As we’ll demonstrate throughout this essay, the company’s essentially non-existent growth makes it a bad buy at this price.
There Is a Lot of Competition
Netflix has stiff competition from extremely wealthy rivals. Amazon (NASDAQ:AMZN) Prime, Disney (NYSE:DIS) Plus, Max, and other services are included. These rivals are also far wealthier than Netflix. Amazon, for example, has a market value of $1.3 trillion, allowing them to spend large sums of money on new programs such as The Hobbit.
Netflix continues to be the dominating streaming provider. The app continues to receive 7% of total watch time in the United States. Internationally, Google’s (NASDAQ:GOOGL) YouTube remains the market leader, but there’s a more compelling tale to be told in the premium markets of the United States and the United Kingdom. In the United States, Disney/Hulu is nearly as big as Netflix, and Prime Video is already half as big.
In the United Kingdom, YouTube is substantially smaller, but Prime Video / Disney and Hulu each have a third as of launch. Given the size of these competitors’ other companies, we anticipate continued growth in competition, putting Netflix in a tough position.
Financial Results for the First Quarter of 2023
Netflix’s expansion has practically stalled, demonstrating the company’s full market penetration size and few more options. Pursuing new ideals (such as growth) has failed.
Revenue for the first quarter of 2023 increased by only 3.7% year on year and by less than that quarter on quarter. For the corporation, this was less than the impact of inflation, meaning that real revenues fell year on year. The company’s net income fell year on year, affecting its EPS. Last year, the company’s annualized EPS was $9.95 per share (P/E >40), and it is expected to be lower this year.
The company saw 4.9% YoY growth in paid memberships, but the revenue impact implies that customers are transferring to lower-cost subscriptions. At the same time, the company’s net additions remain modest, indicating that its firm is still struggling. Despite the fact that the first quarter is often the strongest, free cash flow (“FCF”) remains inadequate, and dilution persists.
That dilution deserves special attention. The corporation added 800,000 shares in the last quarter but $2.1 billion in FCF (its strongest FCF quarter). Because of the additional shares, the company’s genuine FCF was over 20% lower, affecting an already low figure.
The Capital Spending Will Continue
At the same time, the corporation continues to incur significant capital expenditures that should be closely monitored.
First, after cash and investments, the corporation has $6.7 billion in net debt. The corporation has a decent credit rating, but it will still need to make up for and pay off using FCF. That’s nearly 4 years of FCF at the company’s FCF pace from last year, not considering dilution. The debt position may be low in comparison to the market cap, but it is still relatively large.
In addition to debt, the corporation has significant capital commitments to maintain content. The company’s capital expenditure guidance for 2024 is $17 billion. The company’s annual income is $33 billion, which indicates that its commitments are already relatively substantial even before any capital spending. These baseload commitments will reduce earnings.
Unfortunately, even with such large content spending, the company is failing to outperform competitors with massive traditional operations that can continue to provide subsidies. Disney intends to spend $30 billion, while Warner Bros. Discovery (NASDAQ:WBD) intends to spend $20 billion. Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) are new industry behemoths, spending $7 and $10 billion, respectively.
To be competitive, Netflix will need to keep capital spending at or above current levels.
Guidance
Netflix’s outlook is likewise extremely weak, indicating that the firm has no way of justifying its valuation.
Revenue is expected to be $8.2 billion for the quarter, up less than 1% QoQ and 3.4% year on year. This is another quarter in which revenue growth will be less than inflation. Both operating and net income are expected to fall QoQ as a result of increasing expenses weighing on margins.
The company’s growth for the next quarter is basically zero. This excludes any subscriber impact as the corporation implements its home limitations.
Thesis Peril
The most significant danger to our premise is that streaming is expanding in general. The corporation also holds a dominating lead in this area. Multibillion-dollar players looking to enter the industry may be interested in Netflix. Any of these situations could lead to substantial growth or earnings for Netflix stock, making it an attractive investment.
Conclusion
Netflix, Inc. has a strong television portfolio and maintains a commanding lead in the streaming sector. However, the corporation has deeply penetrated its target areas, and growth rates have significantly decreased. Revenue growth at the corporation is no longer even keeping up with inflation.
Simultaneously, deep-pocketed competition is increasing significantly. Netflix is already devoting more than half of its revenue to expansion, and even so, it cannot compete with the two most competitive streaming services, Disney Plus and Max. We predict the company to continue struggling in the future, making Netflix stock a terrible investment with continuing dilution.
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