Where Will Netflix Stock Be in 1 Year?

Netflix (NFLX -0.63%) posted its first-quarter earnings report on April 18. The streaming pioneer's revenue rose 4% year over year to $8.16 billion but missed analysts' estimates by $20 million. Its net income dropped 18% to $1.31 billion, or $2.88 per share, yet still cleared the consensus forecast by $0.01.

Netflix's stock held steady after the mixed report, but it remains more than 50% below its all-time high from November 2021. Will it bounce back over the next 12 months? Let's review its recent challenges and potential catalysts to decide.

Image source: Getty Images.

What happened to Netflix?

Netflix's growth accelerated during the pandemic as people stayed at home and streamed more videos. However, its year-over-year growth in revenue and paid subscribers decelerated throughout 2021 and 2022 as the pandemic waned. Its exit from Russia and competition from Disney (DIS -0.04%), Warner Bros. Discovery (WBD -2.17%), Paramount (PARA -2.22%), and others in the crowded streaming market exacerbated that slowdown.

When Netflix suffered its first sequential loss of subscribers in more than a decade in the first quarter of 2022, a slew of bears barged in. The departure of co-founder and co-CEO Reed Hastings, who handed the reins over to his co-CEO Ted Sarandos this January, further suggested its heyday was over. In addition, Netfllx's decision to launch a cheaper ad-supported tier and crack down on shared passwords suggested it was running out of fresh ways to grow its revenue.

Its growth rates are stabilizing

But if we look at Netflix's first-quarter numbers, we'll see its year-over-year growth in revenue and paid subscribers actually accelerated for the first time in two years.

Data source: Netflix. YOY = year over year.

However, it still missed its own forecast for a 3.9% revenue increase and analysts' expectations for 233.05 million subscribers. Its growth was hampered by currency headwinds, lower overseas prices, and macro challenges.

As for its new ad-supported tier, Netflix said it was still in the "very early days" and it's "seen very little switching from our standard and premium plans" thus far. But it also said the engagement rates for the ad-supported tier were coming in "above our initial expectations." The company also said it was "pleased" with the initial rollout of its paid password-sharing plans. 

For the second quarter, Netflix expects its revenue to rise 3.4% year over year. For the full year, analysts forecast a 9% increase in revenue, compared to 6% growth in 2022.

But its margins are still being squeezed

Netflix's top line might be stabilizing, but its operating margin still contracted 410 basis points year over year to 21% in the first quarter. That exceeded its own forecast for an operating margin of 19.9%, but its margins are still being negatively impacted by currency headwinds and content-related investments.

Nevertheless, Netflix still expects its operating margin to rise from 18% in 2022 to 18%-20% in 2023. It expects its margins to stabilize as its revenue growth accelerates, the currency headwinds wane, and it expands its nascent advertising business.

Investors should bear in mind that Netflix is still the only major streaming platform that generates consistent profits. Disney, WBD, and Paramount are all racking up steep losses as they try to accomplish what Netflix did over 16 years in a much shorter time frame. The success of original shows like You, Outer Banks, Ginny & Georgia, The Night Agent, and The Glory also demonstrates that it doesn't need big intellectual properties or blockbuster franchises to lock in more subscribers. Instead, its AI algorithms are still successfully predicting exactly which types of original shows and movies will attract more viewers.

As a result, Netflix expects to generate more than $3.5 billion in free cash flow (FCF) in 2023, more than double its $1.6 billion in FCF in 2022 and above its previous goal of at least $3 billion. It plans to return a lot of that cash to its investors: It already repurchased $400 million in shares in the first quarter and it plans to accelerate those buybacks throughout the year.

The problem with Netflix: Its valuation

Analysts expect Netflix's earnings to grow 15% for the full year, compared to its 11% decline in 2022. But the shares trade at 29 times forward earnings, which suggests it's still being valued like a FAANG stock instead of as a media stock which better describes its business now. By comparison, Disney and Paramount trade at 24 and 23 times forward earnings, respectively, while WBD is unprofitable.

That higher valuation will limit Netflix's growth potential over the next 12 months and likely cause it to underperform the market. Its business is stable, but it still needs to be valued like a media company instead of a high-growth tech giant.