Streaming Titan's Stock Ready to Hit All-Time Highs This Year

Key Points

• Netflix reported a strong quarter, including margin expansion, but failed to catalyze a rally. 
• The full-year guidance is favorable, but some weakness is expected in Q2. 
• The analysts' response to the news was good, including numerous price target revisions that led this market to a new all-time high. 

Netflix's NASDAQ: NFLX stock price corrected about 5% ahead of its Q2 earnings release, and the correction may not be over now that the results are out, but it will soon result in a buying opportunity. Though mixed relative to analysts' consensus forecasts, the Q2 results were robust, featuring growth, margin expansion, and a forecast for increased capital returns, expected to drive higher stock prices over time.

The analysts' response has been favorable, and they are leading the market to new highs with their revisions. MarketBeat tracked a half-dozen revisions within the first 12 hours of the release, extending a trend that began last year, including an upward price target revision. The consensus assumes fair value at the current levels, but it is rising and may provide a floor for the market. However, the chance for a new all-time high is the critical detail for Netflix investors today. The analysts are leading the market to a range above consensus, which is good for a new all-time high. 

Unlike other mega-tech leaders such as Meta Platforms NASDAQ: META, this stock has yet to surpass its 2022 all-time highs, a significant technical milestone that can lead to accelerating price action. Meta Platforms, Microsoft NASDAQ: MSFT, Alphabet NASDAQ: GOOGL, and Oracle NYSE: ORCL crossed those levels last year and gained 25% or more after they did. 

Netflix Hurdle Becomes A Tailwind

As problematic as the shift to ad-supported tiers was for Netflix's outlook, it has become a tailwind supporting the company’s growth. Netflix reported $9.56 billion in net revenue for a gain of 16.7%, outpacing the analyst consensus by 30 bps, on a 16% increase in paid memberships led by a 34% increase in ad-tier membership. Global paid customers grew by 8 million or 3%, with increased usage, ad-tiers, and pricing leading to margin strength. 

Regionally, strength is centered in the US, with revenue per user up 7%. EEAC and LATAM produced FX-neutral growth offset by FX translation, while APAC revenue per user contracted on an FX-neutral and reported basis. 

The margin news is best. The company widened its operating margin by 500 basis points and expects strength to continue. The increased margin led to accelerated income and earnings growth, with net income up 42% and GAAP earnings 48%. GAAP earnings outpaced consensus by 300 basis points and resulted in improved guidance. 

Guidance is why the stock will move higher, given time. The company issued tepid guidance for Q2, falling below consensus, but still expecting 14% YoY growth and an acceleration from last year. The long-term outlook is more robust. The full-year revenue guidance was increased by 100 basis points at the low end, raising the mid-point to align with the analysts' consensus.

Netflix Builds Leverage for Investors

Netflix's cash flow and FCF are down marginally year over year due to FX translation but are still robust and sufficient to sustain the healthy balance sheet. The company continues to lean into programming and product development, which is the bulk of its spending, but it has ample cash flow left for share repurchases. The repurchases in Q2 topped $1.6 billion, reducing the count by 2.6% on average for the quarter, and there is still $5 billion left. 

Highlights from the balance sheet include a cash reduction offset by increased assets, reduced liabilities, and improved shareholder equity. Equity is up 10% compared to last year. Because leverage remains low at 2x cash and 0.55x equity, the company can continue investing in growth, margin improvement, and capital returns. 

Sector Rotation Saps Appetite for Netflix, Buy it on The Dip

Given the market environment, as good as Netflix's news is, it was insufficient to catalyze a strong rally. The June CPI report sparked a massive sector rotation from tech into small caps and blue chips that has yet to run its course. The takeaway is that Netflix share prices may move lower before they move higher, but higher prices and new all-time highs are forecasted. The critical target for support is near $635; provided that level holds, the rebound could begin soon. If not, NFLX shares could fall to the $600 level before finding solid support.