Big Netflix Price Target Boost Could Be Conservative on One Condition
After strong earnings have impressed Wall Street, the streaming giant could be a communications refuge amid tariffs.
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Netflix NFLX became the first of the old FANG names to report this earnings season, last Thursday afternoon after the closing bell.
That was an odd time to report as there are not very many firms willing to report on Friday afternoons during five-day trading weeks. That said, Netflix reported in near isolation. The stock ran sharply higher in after-hours trade that evening, and though well off those highs, is still trading in the green on Monday morning despite a red tape.
For the three-month period ended March 31, Netflix posted a Q1 GAAP EPS of $6.61 on revenue of $10.54 billion. These top- and bottom-line numbers both beat Wall Street's expectations, quite decisively as the revenue print reflected year-over-year growth of 12.5%. Operating margin also beat Wall Street, growing sharply from the year-ago comparison.
The firm explained that the revenue growth during the quarter was driven in part by membership growth. That said, this was the first quarter that Netflix did not disclose subscription totals and average revenue per user as the firm's focus is now rightfully on revenue generation and earnings.
Netflix Operations
As revenue grew 12.5% to $10.543 billion, the cost of those revenues increased 7.8%, sales and marketing expenses increased 5.2%, technology and development expenses grew 17.1% and administrative expenses increased 4.3%. This left an operating income of $3.347 billion (+27.1%) as operating margin expanded from 28.1% to 31.7%.
After accounting for interest, taxes and other income/expenses, GAAP net income printed at $2.89 billion (+23.9%). This works out to $6.61 in earnings per fully-diluted share, up from $5.28 for the year-ago period.
Netflix Regional Sales Performance
- UCAN (U.S. and Canada): Revenue increased 9% to $4.617 billion
- EMEA (Europe, Middle East & Africa): Revenue increased 15% (16% ex-FX) to $3.405 billion
- LATAM (Latin America): Revenue increased 8% (27% ex-FX) to $1.262 billion
- APAC (Asia/Pacific): Revenue increased 23% (26%) to $1.259 billion
Netflix Stock Fundamentals
For the period, Netflix generated operating cash flow of $2.789 billion, out of which came capex spending of $128 million. This left free cash flow of $2.661 billion.
The firm does not pay a cash dividend to shareholders, but did repurchase $3.536 billion worth of common stock. I'm not totally comfortable with returns to shareholders that outweigh free cash, especially when there is no dividend involved, which implies that corporate executives may be rewarding themselves ahead of smaller investors. That's just my opinion, but such is life.
Turning to the balance sheet, Netflix ended the quarter with a cash position of $8.371 billion and current assets of $11.327 billion. Current liabilities add up to $9.719 billion, of which deferred revenue (which is not a true financial obligation) made up $1.609 billion. Short-term debt stands at $1.006 billion. That puts the firm's current ratio at 1.20 and, adjusted for those deferred revenues, at 1.44. Both of those ratios, while not stellar, easily pass muster.
Total assets amount to $52.088 billion, while total liabilities less equity sits at $28.059 billion, which includes long-term debt of $14.011 billion. I don't love the size of the debt load, but it is not out of control and not abnormal in today's environment.
Netflix Guidance
For the second (current) quarter, Netflix is projecting revenue growth of 15.4% (17% ex-FX) and an operating margin of 33.3%. That would be good for a 610-basis point improvement over the year-ago comp. The firm sees EPS at $7.03, up from $4.88, as net income grows 42.3% to $3.055 billion. This is outstanding guidance and had as much to do with the Thursday night pop as did first quarter performance.
For the full year, the firm is still projecting revenue of $43.5 billion to $44.5 billion, assuming healthy member growth, higher subscription prices and a rough doubling of ad revenue. At $44 billion, the midpoint actually falls below the $4.3 billion that Wall Street had in mind. That said, the firm acknowledged in the press conference that revenue is tracking above that midpoint, but it was not ready to adjust full-year guidance. Full-year operating margin is seen at 29%. Perhaps most importantly, management reiterated their forecast for full year free cash flow of about $8 billion.
Wall Street on Netflix
Since these earnings were released, I have found 11 highly-rated (four-plus stars at TipRanks) sell-side analysts that have opined on NFLX. For those who may be confused, a lot of analysts who are not so highly rated have also opined. Those analysts (which include some well-known fin-TV regulars) do not make my cut.
After allowing for changes (there were a lot of increased target prices), there are nine "buy" or buy-equivalent ratings and two "hold" or hold-equivalent ratings among the 11. One of the "buys" did not set a target, so we have just 10 of those to work with. The average target price across the remaining ten analysts is $1,149.70 with a high of $1,350 (Jeffrey Wlodarczak of Pivotal Research) and a low of $955 (Eric Sheridan of Goldman Sachs). Once omitting those two as potential outliers, the average target across the other eight drops slightly to $1,149.
Thoughts on Netflix Stock
The business is rocking. Execution is strong on the consumer end. I think the meat and potatoes of what comprises the fundamentals could be better managed. The bottom line is that the guidance is outstanding, and Wall Street is largely impressed.
Readers will see that NFLX found support recently at an almost perfect 23.6% Fibonacci retracement of the rally that has more or less been in place since spring of 2022. Now, look to the upper right-hand corner of the most recent action and check this out:
The stock appears to have ignored what looks like a head-and-shoulders pattern, which would have been bearish, and after bouncing off of its 200-day SMA, is making a new run at the high point of the right shoulder.
If the head and shoulders was not respected, and the stock, which is not likely to be impacted by tariffs at all, is set to become something of an internet/communications sector refuge for investors, are we looking at a double-bottom pattern at the top of the chart? We may be, with a $998 pivot. Now, I have not been a fan of NFLX in the past and it has often cost me, if not in dollars and cents, at least in time and effort as I had to trade my way out of trouble.
I'll tell you this: If NFLX can take and hold that $998 pivot, then something like a target price of $1,120 could be conservative.
If I don't feel like paying these prices for the equity in this market right now, I might not be opposed however, to writing $900 puts expiring this Friday for about $3. If still nervous one could buy a like amount of $880 puts also expiring this Friday for about $1.75 just to avoid getting one's face ripped off if catastrophe should strike.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
