Investors just received a flood of fresh information about Netflix's (NFLX 0.10%) business. On April 18, the streaming video leader posted its third consecutive quarter of growth following a pandemic hangover in early 2022, and profitability was strong.
But the short-term sales outlook was underwhelming. Executives also described an intense battle with competitors both inside and outside of streaming TV.
Let's take a closer look at the Q1 update and whether it makes the stock more attractive today.
Sluggish growth continues
Netflix has turned a corner since it posted two consecutive quarters of modest subscriber declines in early 2022. Since then, the service added 12 million new members, pushing its global base to more than 232 million. But the company is still far from the double-digit revenue growth pace that management has targeted.
NASDAQ: NFLX
Key Data Points
Sales rose 4% in Q1 and are projected to increase by 3% in fiscal Q2. Management said in January that it saw a clear path toward accelerating revenue growth. But investors are still waiting for confirmation of that momentum shift, which might start in the second half of 2023.
The good news
The news was more clearly positive around Netflix's finances. Operating profit landed at $1.7 billion, or 21% of sales, at a time when many rival streamers are struggling to build profitable platforms. Free cash flow soared to over $2 billion, and management now sees this metric rising to $3.5 billion in 2023 to more than double year over year.
"We're off to a good start in 2023," executives said in a letter to shareholders.
NFLX Free Cash Flow data by YCharts
The company still sees profit margin rising to nearly 20% of sales for the full year after sitting at near that market-leading rate for several years. Subscriber growth will help, but so will new revenue coming from advertising and paid account sharing plans. Netflix is broadly aiming to become much more flexible in offering plans that fit any budget.
"We want to be more sophisticated around pricing," executives told investors.
Is the stock a buy?
Netflix might struggle to return to double-digit sales growth by 2024, given all the competition around streaming content. If you believe that bearish reading, then the stock doesn't seem especially attractive today. It is priced at nearly 5 times annual sales compared to Roku's 2.8 ratio and Disney's 2.2 ratio.
On the other hand, the business is clearly generating strong profits and cash flow today -- even in the current slow-growth scenario. These financial assets will look even better over the next several quarters if sales trends accelerate as management predicts they will. That's an enticing trade-off between risk and reward given the stock's more than 40% decline since early 2022.
Netflix does face some challenges around reaccelerating its growth rate. But positive engagement trends, its scale in this expanding entertainment industry, and ample financial resources are all factors that give it a great shot at achieving this goal. Investors are likely to see solid returns from here.
