Is Netflix Stock a Buy Now?

Netflix's (NFLX -0.14%) stock jumped 7% during after-hours trading on Jan. 19 following the company's fourth-quarter report. The streaming video leader's revenue rose 2% year over year to $7.85 billion, which matched analysts' expectations. But its net income fell 91% to $55 million, or $0.12 per share, and broadly missed the consensus forecast by $0.38 per share.

Nevertheless, investors were impressed by Netflix's growth in paid subscribers, which rose 4% year over year to 230.75 million and cleared its own forecast by 3.16 million. That also represented its second consecutive quarter of sequential subscriber growth after it lost subscribers in the first and second quarters of 2022.

Image source: Getty Images.

The expansion of Netflix's customer base alleviated some concerns about its potential loss of subscribers to Disney+ (NYSE: DIS), Warner Bros. Discovery's (NASDAQ: WBD) HBO Max, and other aggressive competitors. But does it actually make Netflix's stock -- which remains more than 50% below its all-time high -- a compelling buy?

Its slowdown could end in 2023

Netflix's growth in revenue and paid subscribers cleared its own forecasts, driven by high viewership numbers for Wednesday, Harry & Meghan, Glass Onion: A Knives Out Mystery, Troll, and other original content. But both growth rates have still decelerated on a year-over-year basis over the past year. 

Data source: Netflix. YOY = year over year.

A strong dollar, buoyed by rising interest rates, exacerbated that slowdown. But here's the silver lining: On a constant currency basis, Netflix's revenue actually rose 10% year over year in the fourth quarter.

It expects its reported revenue to increase 3.9% year over year (and about 8% on a constant currency basis) in the first quarter of 2023. Analysts project its reported revenue to grow 7% to $33.9 billion for the full year.

Shifting from subscribers to revenue

Netflix notably stopped providing guidance for its paid subscribers this quarter. When it announced that change last October, VP of Finance Spencer Wang said "focusing on subscribers in our early days was helpful," but with so many "price points and different partnerships" worldwide, the "economic impact of any given subscriber" can be very different.

That change also encourages investors to focus on the growth of Netflix's different revenue streams -- which include its paid memberships, ad-supported tiers, and paid sharing plans -- instead of how many subscribers it gains each quarter. Netflix didn't provide any hard numbers for its ad-supported tiers (they launched just two months ago), but it said advertising, along with its new password-sharing charges, are a core "component" of its revenue growth in 2023.

As part of that transformation, Netflix's co-founder Reed Hastings stepped down from the co-CEO position that he shared with content chief Ted Sarandos. Chief Operating Officer Greg Peters will join Sarandos as Netflix's new co-CEO and Hastings will become the company's executive chairman.

Its margins and profits could stabilize in 2023

Netflix's top-line growth might be stabilizing, but its operating margin fell from 20.9% in 2021 to 17.8% in 2022. Its net income declined 12% for the full year. That pressure was mainly caused by the rapid rise of the dollar, which significantly reduced its overseas revenue and profits. Netflix generated 54% of its revenue outside of the U.S. and Canada in the fourth quarter, and that percentage should keep rising as it expands globally.

But in 2023, Netflix expects its operating margin to rise to 21%-22% as its revenue growth accelerates, it expands its higher-margin advertising business, and exchange rates stabilize. Analysts project its earnings to grow 2% for the full year.

But is Netflix's stock still too expensive?

Netflix's stock was crushed over the past year, but its business certainly isn't doomed. It's still growing, and it remains consistently profitable as Disney, Warner Bros. Disovery, and other traditional media companies rack up billions of dollars in ongoing losses to expand their streaming media platforms. Netflix generated $1.62 billion in free cash flow (FCF) in 2022, compared to a negative FCF of $159 million in 2021, and it expects that figure to rise to "at least" $3 billion in 2023. That impressive liquidity gives it plenty of room of license and produce fresh content or expand its ecosystem with new features.

But at 30 times forward earnings, Netflix is still valued like a growth stock though it remains on track to generate single-digit revenue and earnings growth in 2023. By comparison, Disney -- which is expected to grow faster than Netflix this year -- trades at just 24 times forward earnings. Paramount (NASDAQ: PARA), which is growing slower than both companies, has a much lower forward price-to-earnings ratio of 14.

Based on these comparisons, I believe Netflix is still too expensive because it should be valued like a traditional media stock instead of a tech stock. Its valuation could limit its upside potential this year, so investors should stick with more promising media or tech stocks instead of betting on Netflix's comeback.