Netflix Stock (NASDAQ:NFLX) plunged on Friday, echoing Wall Street’s dissatisfaction with the streaming giant’s Q1 earnings report. The double-digit share price nosedive can be traced back to management’s decision to stop reporting paid membership figures starting next year. Investors saw this move as a sign of potential challenges ahead for the business, overshadowing a stellar quarter. Notably, Netflix celebrated an acceleration in memberships and revenues. Given this contrast, I’m bullish on NFLX stock.
Changes to Reporting Overshadows an Excellent Q1 Report
Netflix posted an excellent Q1 report, in my view, marked by accelerating top- and bottom-line growth as well as exciting guidance. Yet, the company’s progress was overshadowed by everyone focusing on the news that the company will stop sharing subscriber data starting in Q1 of 2025.
On the one hand, I can understand why this market interprets this decision as management signaling possible headwinds, moving forward. After all, if they were expecting subscribers to keep rising rapidly, they would definitely want to report and celebrate that. This means the company must expect that subscriber growth will disappoint moving forward, right?
Well, I don’t think this is actually the case. To some extent, I trust management’s rationale behind this decision. Netflix’s revenue mix is now evolving, with Advertising revenues, for instance, expected to rise into a larger chunk of total revenues. In Netflix’s Q1 earnings call, co-CEO Greg Peters built on that argument by stating, “…And all of that means that historical simple math that we all did, number of members times the monthly price is increasingly less accurate in capturing the state of the business.”
Assuming Netflix is going to keep evolving its revenue mix, management is trying to detach investors and analysts from the old prototype of forecasting future revenues, which has merit. Do I think this is a net negative decision, as transparency with shareholders is of utmost importance? Absolutely yes.
Netflix could have just directed toward a different forecast methodology without depriving investors of an incredibly important business metric. Still, I don’t see management’s decision as shady as the market seems to perceive it.
Pay Attention to Netflix’s Momentum Instead
As I noted, news on Netflix’s future reporting overshadowed a rather strong quarter, during which Netflix continued to build robust momentum. Despite the streaming industry grappling with extreme saturation and competition, Netflix once again proved its King status by posting re-accelerating growth metrics.
To begin with, Netflix continued to accelerate its growth in paid memberships. This is quite noteworthy in light of the ongoing speculations suggesting impending challenges for the platform in this area. In any case, to illustrate the ongoing acceleration in membership growth, take a look at Netflix’s year-over-year growth in paid subscribers over the past nine quarters.
- Q1 2022: 6.7%
- Q2 2022: 5.5%
- Q3 2022: 4.5%
- Q4 2022: 4.0%
- Q1 2023: 4.9%
- Q2 2023: 8.0%
- Q3 2023: 10.8%
- Q4 2023: 12.8%
- Q1 2024: 16.0%
In the meantime, the company made significant progress in its free, ad-supported tier. More specifically, Netflix’s ad-supported membership count grew 65% quarter-over-quarter after growing by nearly 70% sequentially in each of the previous two quarters.
Consequently, the combination of superb growth in paid members and additional ad revenues brought in by its free tier resulted in the company posting revenue growth of 14.8% to a new record of $9.37 billion. This figure also implies a strong acceleration both from the previous quarter’s and last year’s revenue growth of 12.5% and 3.7%, respectively.
Netflix’s Valuation Looks Attractive Post-Plunge
The contrast between Netflix’s significant Q1 growth overall and its share price plunging has led to the stock currently trading at a rather attractive valuation, in my view. Netflix’s growth and ongoing margin expansion propelled its quarterly EPS to $5.28, up 83% compared to last year. Therefore, it doesn’t come as a surprise that consensus EPS estimates for the full year point to a year-over-year growth of 51% to about $18.17.
At its current levels, this implies the stock is trading at a P/E of about 30.5x. I believe this is an attractive valuation, given that Netflix is currently experiencing a reacceleration in revenue growth and a margin expansion phase simultaneously. Even if earnings growth is to slow down from 2025 onwards, it should remain at rates that are compelling enough to make the stock look cheap at a (then) sub-30 P/E, all other things being equal, which implies upside potential.
Is NFLX Stock a Buy, According to Analysts?
Looking at Wall Street’s view on Netflix, the stock has drawn a Moderate Buy consensus rating based on 27 Buys, 12 Holds, and one Sell assigned in the past three months. At $637.29, the average Netflix stock price target implies 14.82% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell NFLX stock, the most accurate analyst covering the stock (on a one-year timeframe) is Jason Helfstein from Oppenheimer, with an average return of 40.7% per rating and an 89% success rate. Click on the image below to learn more.
Final Thoughts on NFLX Stock
To sum up, I think it’s quite clear that the market’s focus on Netflix’s decision to stop sharing membership numbers overshadowed a rather strong Q1 performance. The company’s underlying growth momentum and massive earnings growth were not recognized by the market at all. In fact, while concerns over future subscriber growth are not entirely unfounded, Netflix’s ongoing trajectory displays a thriving streaming company. Thus, the post-earnings plunge has likely formed a compelling investment opportunity.
