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Netflix Stock: Net Margins Need to Improve

It's reasonably safe to say that everyone is familiar with Netflix (NASDAQ:NFLX). With over 209 million paid subscribers (and multiple more viewers, including the households in...
Netflix Stock: Net Margins Need to Improve © Reuters. Netflix Stock: Net Margins Need to Improve

It's reasonably safe to say that everyone is familiar with Netflix (NASDAQ:NFLX).

With over 209 million paid subscribers (and multiple more viewers, including the households in this figure), Netflix has become almost synonymous with streaming services. Having first-mover advantage certainly helped in establishing its dominant position.

However, competition has been heating up lately. Major players in the industry like Disney (DIS), AT&T (NYSE:T), and Amazon (NASDAQ:AMZN), with their respective services of Disney +, HBO Max, and Prime Video, have saturated the industry.

In fact, niche streaming services have started to target very specific target groups to grab the market shares in these underserved markets. Examples of such services include Gaia (NASDAQ:GAIA), CuriosityStream (CURI), and FuboTV (NYSE:FUBO).

Hence, investors may rationally speculate that Netflix's dominance shall fade, with subscription growth likely to stall moving forward. While such concerns translated to Netflix trading flat for around a year, the stock has recently reached new highs. (See NFLX stock charts on TipRanks)

Accordingly, Netflix's future remains rather bright. The company should start producing satisfactory free cash flow levels, and eventually return some of this cash through its stock repurchase program.

Hence, I am bullish on the stock. However, the risk which comes with the never-ending need to produce original content is likely to weigh Netflix down.

Solid Growth, but Margins Need to Improve

Netflix's Q2 results were rather strong, with revenue increasing 19% year-over-year to $7.3 billion. Revenue growth was primarily supported by an 11% rise in average paid streaming memberships, and an 8% increase in average revenue per membership (ARM). Excluding a foreign exchange (FX) impact, ARM rose 4%, to be exact.

As a result, Netflix's net income also expanded significantly, by 87.9% to $1.35 billion. Despite these numbers, what rattled investors was management's guidance. The company expects Q3 revenues of $7.48 billion, implying year-over-year growth of just 16.2%.

Is this rather worrying? Does this mean fears of a potential slowdown are finally starting to materialize? Maybe. The truth is, Netflix does not necessarily need to rapidly grow its subscribers at this point. A significant improvement in margins is all that is needed, in the end, to justify its admittedly pricey forward P/E of 45.9.

The company knows this, and efforts to improve margins in order to sustain the continuously higher original content production expenses have indeed been achieved as Netflix scales.

The annual operating margin has been growing every year sequentially for quite some time now. From just 4.3% in 2016, it is expected to reach 20% at the end of FY2021. Still, in the last four quarters, Netflix has generated $1.84 billion in operating cash flows. Of these, $449 million has been allocated in new content, and $500 million to repay debt.

Hence, the bottom line needs to meaningfully expand if shareholders are to actually see any cash returned anytime soon.

Wall Street’s Take

Turning to Wall Street, Netflix has a Moderate Buy consensus rating, based on 23 Buys, seven Holds, and three Sells assigned in the past three months. At $617.93, the average NFLX price target implies 4.9% upside.

Bottom Line

Netflix has established a household name-level brand value, which should be leveraged long-term through potential acquisitions of the new, smaller players mentioned earlier, as well as pricing hikes.

That being said, at its current valuation, management has still a lot to prove in terms of a much-needed margins expansion.

Netflix's consensus rating quite accurately reflects this, with little to no short-term upside left at the stock's current levels.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

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28-09-2021 06:04:14 (UTC+7)

EUR/USD

1.1695

+0.0001 (+0.01%)

Summary

↑ Sell

Moving Avg:

Buy (2)

Sell (10)

Indicators:

Buy (1)

Sell (6)

EUR/USD

1.1695

+0.0001 (+0.01%)

Summary

↑ Sell

Moving Avg:

Buy (2)

Sell (10)

Indicators:

Buy (1)

Sell (6)

GBP/USD

1.3702

+0.0008 (+0.05%)

Summary

↑ Buy

Moving Avg:

Buy (8)

Sell (4)

Indicators:

Buy (6)

Sell (0)

USD/JPY

110.99

-0.01 (-0.01%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (1)

Sell (4)

AUD/USD

0.7286

0.0001 (0.00%)

Summary

Neutral

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (4)

Sell (1)

USD/CAD

1.2627

0.0000 (0.00%)

Summary

Buy

Moving Avg:

Buy (9)

Sell (3)

Indicators:

Buy (4)

Sell (3)

EUR/JPY

129.81

+0.03 (+0.02%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (1)

Sell (6)

EUR/CHF

1.0827

+0.0004 (+0.04%)

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↑ Sell

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Buy (4)

Sell (8)

Indicators:

Buy (1)

Sell (6)

Gold Futures

1,751.00

+1.15 (+0.07%)

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Neutral

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Buy (8)

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Buy (3)

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Silver Futures

22.650

+0.013 (+0.06%)

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↑ Buy

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Buy (10)

Sell (2)

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Buy (9)

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Copper Futures

4.2787

-0.0010 (-0.02%)

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↑ Buy

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Buy (10)

Sell (2)

Indicators:

Buy (8)

Sell (1)

Crude Oil WTI Futures

75.34

-0.07 (-0.09%)

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↑ Sell

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Buy (4)

Sell (8)

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Sell (7)

Brent Oil Futures

78.62

+0.01 (+0.01%)

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↑ Buy

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Buy (4)

Sell (1)

Natural Gas Futures

5.912

+0.052 (+0.89%)

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Neutral

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Buy (7)

Sell (5)

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US Coffee C Futures

194.98

+0.63 (+0.32%)

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↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (5)

Sell (0)

Euro Stoxx 50

4,165.48

+6.97 (+0.17%)

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↑ Sell

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Buy (0)

Sell (12)

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Sell (9)

S&P 500

4,443.11

-12.37 (-0.28%)

Summary

↑ Sell

Moving Avg:

Buy (3)

Sell (9)

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Buy (0)

Sell (9)

DAX

15,573.88

+42.13 (+0.27%)

Summary

↑ Sell

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Sell (12)

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Buy (0)

Sell (8)

FTSE 100

7,063.40

+11.92 (+0.17%)

Summary

↑ Sell

Moving Avg:

Buy (1)

Sell (11)

Indicators:

Buy (1)

Sell (7)

Hang Seng

24,208.78

+16.62 (+0.07%)

Summary

↑ Buy

Moving Avg:

Buy (10)

Sell (2)

Indicators:

Buy (8)

Sell (0)

US Small Cap 2000

2,281.79

+33.71 (+1.50%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (0)

Sell (7)

IBEX 35

9,002.90

+129.80 (+1.46%)

Summary

Buy

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Buy (7)

Sell (5)

Indicators:

Buy (4)

Sell (2)

BASF SE NA O.N.

64.740

+1.040 (+1.63%)

Summary

↑ Sell

Moving Avg:

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Bayer AG NA

47.47

+0.99 (+2.13%)

Summary

↑ Buy

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Buy (12)

Sell (0)

Indicators:

Buy (9)

Sell (0)

Allianz SE VNA O.N.

196.19

+3.85 (+2.00%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

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Buy (6)

Sell (2)

Adidas AG

278.80

-2.77 (-0.98%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (0)

Sell (10)

Deutsche Lufthansa AG

6.561

+0.328 (+5.26%)

Summary

↑ Buy

Moving Avg:

Buy (11)

Sell (1)

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Buy (7)

Sell (2)

Siemens AG Class N

147.27

-0.84 (-0.57%)

Summary

↑ Sell

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Buy (1)

Sell (11)

Indicators:

Buy (0)

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Deutsche Bank AG

11.120

+0.285 (+2.63%)

Summary

↑ Buy

Moving Avg:

Buy (10)

Sell (2)

Indicators:

Buy (5)

Sell (3)

 EUR/USD1.1695↑ Sell
 GBP/USD1.3702↑ Buy
 USD/JPY110.99↑ Sell
 AUD/USD0.7286Neutral
 USD/CAD1.2627Buy
 EUR/JPY129.81↑ Sell
 EUR/CHF1.0827↑ Sell
 Gold1,751.00Neutral
 Silver22.650↑ Buy
 Copper4.2787↑ Buy
 Crude Oil WTI75.34↑ Sell
 Brent Oil78.62↑ Buy
 Natural Gas5.912Neutral
 US Coffee C194.98↑ Buy
 Euro Stoxx 504,165.48↑ Sell
 S&P 5004,443.11↑ Sell
 DAX15,573.88↑ Sell
 FTSE 1007,063.40↑ Sell
 Hang Seng24,208.78↑ Buy
 Small Cap 20002,281.79↑ Sell
 IBEX 359,002.90Buy
 BASF64.740↑ Sell
 Bayer47.47↑ Buy
 Allianz196.19↑ Buy
 Adidas278.80↑ Sell
 Lufthansa6.561↑ Buy
 Siemens AG147.27↑ Sell
 Deutsche Bank AG11.120↑ Buy
Mua/Bán 1 chỉ SJC
# So hôm qua # Chênh TG
SJC Eximbank5,665/ 5,715
(0/ 0) # 900
SJC HCM5,635/ 5,700
(0/ 0) # 885
SJC Hanoi5,635/ 5,702
(0/ 0) # 887
SJC Danang5,635/ 5,702
(0/ 0) # 887
SJC Nhatrang5,635/ 5,702
(0/ 0) # 887
SJC Cantho5,635/ 5,702
(0/ 0) # 887
Cập nhật 28-09-2021 06:04:17
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ↀ Giá vàng thế giới
$1,751.42+1.930.11%
Live 24 hour Gold Chart
ʘ Giá bán lẻ xăng dầu
Sản phẩmVùng 1Vùng 2
RON 95-IV2204022480
RON 95-II,III2194022370
E5 RON 92-II2071021120
DO 0.05S1658016910
DO 0,001S-V1693017260
Dầu hỏa1564015950
ↂ Giá dầu thô thế giới
WTI$75.18-0.49-0.66%
Brent$78.60-0.59-0.76%
$ Tỷ giá Vietcombank
Ngoại tệMua vàoBán ra
USD22.630,0022.860,00
EUR25.993,7727.346,60
GBP30.324,2231.591,18
JPY200,45212,05
KRW16,7520,39
Cập nhật lúc 05:57:45 28/09/2021
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