Netflix Stock: Bear vs. Bull

Netflix's (NFLX 2.06%) stock price jumped nearly 13% during after-hours trading Wednesday after it posted a strong third-quarter earnings report. The streaming video leader's revenue rose 8% year over year to $8.54 billion and matched analysts' expectations. Its EPS grew 20% to $3.73 and also cleared the consensus forecast by $0.23.

Netflix's headline numbers looked rock-solid, but does its stock still have room to run after rallying more than 40% over the past 12 months? Let's review the key numbers -- along with the bear and bull cases -- to see if it's worth buying.

Image source: Getty Images.

Reviewing the key numbers

Netflix's paid subscribers grew 11% year over year to 247.15 million during the quarter and marked its third consecutive quarter of accelerating growth. Its year-over-year growth in revenue also accelerated for the third consecutive quarter.

Data source: Netflix. YOY = Year over year.

Netflix expects that acceleration to continue with 10.7% year-over-year revenue growth in the fourth quarter, which implies its full-year revenue will rise 6.2% for the full year. That's slightly below analysts' expectations for 6.7% growth.

It attributed its stable growth to hit English-language shows like One Piece, The Witcher, Top Boy, Sex Education, Love at First Sight, and Suits, as well as popular local language shows like Dear Child, Sintonia, Guns & Gulaabs, and Class Act. It also noted its new ad-based tier "continues to grow" with more than 70% sequential growth.

Netflix's operating margin expanded 10 basis points sequentially and 310 basis points year over year to 22.4% in the third quarter. It expects its full-year operating margin to rise from 18% in 2022 to 20% in 2023, and to continue climbing to 22%-23% in 2024. It expects its EPS to grow 21% in 2023, compared to analysts' expectations for 20% growth.

Netflix's rising margins prompted it to raise its full-year free cash flow (FCF) forecast from "at least" $5 billion to about $6.5 billion, which would be more than quadruple its $1.6 billion in FCF in 2022. It plans to return a lot of that cash to its investors: It repurchased $2.5 billion in shares in its third quarter and boosted its buyback authorization to $10 billion.

Why the bears still don't like Netflix

The bears will point out that Netflix's insiders are still net sellers even as the company plows billions of dollars into big buybacks. Over the past three months, the company's insiders sold more than 199,000 shares, and didn't buy a single share. Over the past 12 months, they sold over 808,000 shares, but only bought about 108,000 shares.

Netflix's stock is also still being valued as though it were a tech company instead of a traditional media company. It might look reasonably valued at 23 times forward earnings, but Walt Disney and Paramount trade at just 17 and 9 times forward earnings, respectively. If the market revalues Netflix as just another media company in this challenging market for media stocks, its stock could tumble.

Lastly, the bears believe it's only a matter of time before Disney, Paramount, Warner Bros. Discovery and other legacy media giants breach Netflix's defenses with their loss-leading streaming media platforms. To counter those threats, Netflix will need to slash its prices while ramping up its investments in new content.

Why the bulls still love Netflix

The bulls will point out that Netflix just hiked the prices of its ad-free basic and premium plans. That bold move should boost its average revenue per paid subscriber, and it implies it still has plenty of pricing power in the streaming market.

Netflix is the only major streaming media platform to be consistently profitable. It achieved that profitability by establishing a first-mover advantage, expanding its cloud infrastructure over several years, and locking in its loyal viewers. Its legacy competitors are burning billions of dollars trying to replicate that long-term growth strategy in a very short time.

The bulls will tell you to simply look at Netflix's stabilizing growth in paid subscribers and revenue, its expanding operating margins, and its soaring FCF to see just how economies of scale are kicking in. That growth cycle should enable Netflix to keep churning out fresh content to widen its moat as the streaming market matures. 

Which argument makes more sense?

Netflix's stock isn't a screaming bargain yet, but it continues to grow and remains the "best in breed" play on the streaming video market. Simply put, I believe the bullish thesis makes a lot more sense than the bearish one -- and Netflix's stock should easily outperform those of most of its legacy media peers for the foreseeable future.