Should You Buy Netflix Stock After Its Earnings?

On October 17th, Netflix (NASDAQ: NFLX) released its Q3 2024 earnings report. By the end of the next day, the stock had already shot up by 8.35%.

The earnings call was a big success. The company’s revenue grew 15% year-over-year (YoY), margins increased to 30% compared to last year’s 20%, and earnings per share (EPS) came in at $5.40 — marking a 6% beat relative to consensus estimates of $5.09.

NFLX shot up almost instantly.

YTD chart for NFLX, courtesy TradingView 

From a financial health perspective, Netflix's debt-to-equity ratio stands at 1.22, a major improvement from 3.94 five years ago. Free cash flow surged to $2.2 billion and paid membership increased by a whopping 35% from the last quarter. 

In terms of guidance, the company is forecasting 15% revenue growth for the next quarter — opting for the high end of prior estimates. Plans are also in motion to increase pricing for premium and standard plans across various key markets.

As rosy of a picture as that is, valuation worries abound. At a price-to-earnings (P/E) ratio of 42x, NFLX is an expensive buy — and if the chart you can see above is any indication, it’s only going to get more expensive. The forward P/E is slightly more appealing at 30x — provided that the stock keeps on outperforming.

So, let’s turn to Wall Street for a moment. In total, 19 top equity researchers issue ratings for the stock. It’s a consensus “Strong Buy”, with an average price target of $718 — which, if achieved, would represent a 4.53% upside.

However, that may change in the near future. It’s likely we’ll be able to get a better reading on how the experts feel in the coming weeks, as plenty of those ratings will no doubt be updated.

There is one thing to note, however — the three researchers who have issued the most up-to-date ratings are significantly more bullish. All three of them — Guggenheim’s Michael Morris, Jason Helfstein of Oppenheimer, and Morgan Stanley’s Benjamin Swinburne, are all rated in the top 10% of all equity analysts.

Swinburne’s price target is $820, recently increased from $780, and would represent an appealing 19.25% upside. The researcher expects 8 million to 9 million new subscribers in Q4, and sees a lot of potential in the new ad-supported tiers for expanding the company’s total addressable market (TAM).

Morris is slightly more conservative, having increased his price forecast from $735 to $810, equalling a 17.79% potential upside. Finally, Helfstein set a $775 price target, up from the previous $725 mark — citing efforts to combat customer churn as the biggest motivator. If Helfstein’s price target is reached, it would represent a 12.70% increase in NFLX stock price.

The average upside of these there forecasts is +16.58% — while it’s a far cry from the stock’s YTD gains, if achieved, it would still represent twice the market’s annual return of the S&P 500.

For now, investors should exercise caution — the last two quarters saw instances of profit-taking that created temporary price dips, which could serve as a more attractive entry point for a long position — a point by which more Wall Street analysts will have issued new ratings, allowing investors to make the decision based on a wider estimate.

—> Click here to research Netflix. If you can’t quite stomach the high valuation, consider taking a look at our Low P/E Ratio Stock Screener.

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