With Netflix’s Q1 earnings on the horizon, investors weigh its high valuation against strong projected revenue growth and improving margins.
- Earnings Report: Netflix is set to report Q1 earnings with revenue projected to grow 14% YOY to $9.3 billion, and EPS expected to spike by over 50% to $4.54.
- Operational Performance: Strong revenue growth and gains of scale are expected to drive a multi-quarter record operating margin of 26.2%.
- Valuation and Outlook: Despite concerns over 35x current-year P/E valuation, Netflix’s projected EPS growth for 2025 implies a relatively low PEG ratio of 1.5x.
Netflix To Report Q1 Earnings: The Must-Knows
Netflix (NFLX) is scheduled to report earnings on Thursday, April 18, after the closing bell. According to Koyfin, revenues are projected to grow YOY by 14% to $9.3 billion, but EPS is expected to spike by more than 50% to $4.54, suggesting margin improvements.
As usual, the company has already provided its outlook for the quarter. Investors should use the following table as its point of reference to assess whether the quarter has been great, mediocre, or something in between:
Source: Netflix Investor Relations
What stands out the most to me are (1) a projected revenue growth rate that is the highest of the past five quarters at least and (2) operating margin expansion of more than five percentage points YOY, also leading to a five-quarter record of 26.2%.
These two items should be related in a way. This is the case because Netflix benefits from gains of scale when revenues grow healthily. In other words: because costs rise at a much slower pace than revenues “around the edges” (ask yourselves: how much additional content cost does Netflix incur per extra subscriber gained?), margins tend to be richer when the video streaming provider is posting strong top-line numbers.
Pay Attention To The Key Operating Metrics
In addition to the key P&L metrics highlighted above, it will be interesting to see what Netflix’s operating metrics will look like. Probably most importantly will be paid net additions, which declined sharply in the COVID-19 recovery period, but recovered swiftly in 2023.
Across every region, from North America to EMEA, Netflix reported a substantial YOY increase in net additions in Q4. Per-member revenues also increased in every geographic segment except Asia Pacific. It will be interesting to see if Netflix can maintain its momentum.
Content quality and popularity does not seem to be a problem, which bodes well for demand for Netflix’s service. According to IMDb, three Netflix shows rank among the five most popular today: Ripley (which debuted only in Q2), Three Body Problem, and The Gentlemen.
NFLX’s Valuation Should Not Be Concerning
Netflix stock will head into earnings day on strength. The share price has climbed a whopping 25% this year already and 82% in the past 12 months. For this reason, potential investors might be skeptical of buying a stock that trades today at about 35x current-year earnings.
The concern over valuation is understandable, in my view, but it may be overstated. With 2025 and 2026 EPS projected to grow by 23% and 22%, respectively, the implied PEG (growth-adjusted P/E) is only 1.5x. This ratio is lower than any of the Mag 7 companies, although close enough to NVIDIA’s (NVDA) 1.7x and Meta Platform’s (META) 1.6x.
Regarding the timing of purchase, for those interested in owning NFLX, I think that ahead of earnings makes the most sense. The predictability of the company’s business model suggests that Netflix is very unlikely to disappoint on results vs. its guidance.
Otherwise, the outlook for Q2 will likely be the most important item for investors to pay attention to. And to the best of my knowledge, the Los Gatos streaming company should not be faced with any concerning challenges at this point, which I think presents low risk to the guidance.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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