Netflix (NFLX) investors should be on the edge of their seats. The Los Gatos, California-based company is scheduled to report its Q4 earnings on January 21, following a very strong Q3 that saw its stock hit new highs by the end of last year. Right now, shares are about 12% below those all-time highs and could use a boost to get back on top. Since I’m bullish on the company, I believe that boost could come from the upcoming Q4 results.
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In this article, I’ll walk through the main reasons why investors can expect good news from Netflix’s Q4 earnings.
What to Expect from Netflix in Q4
Before I dive into my bullish case for Netflix, it’s important to look at the consensus expectations for Q4. For the December quarter, to exceed estimates, Netflix will need to report an EPS of at least $4.21 per share, which would represent a ~99% year-over-year increase. To surpass revenue estimates, the company should report revenue exceeding $10.12 billion, reflecting a ~14.7% annual growth.
These numbers are based on upbeat revisions by analysts over the past three months. Out of 30 analysts providing EPS forecasts, 27 raised their estimates by an average of 8.2%. Similarly, among 33 analysts forecasting revenues, 28 also raised their estimates—though the overall consensus has remained relatively flat during this period.
Looking at Netflix’s own guidance, the consensus might actually be on the conservative side. The company expects revenue growth of 15% year-over-year and an operating margin of 22%, which would be a five-percentage-point improvement compared to last year.
I don’t believe that Netflix missing op margin guidance or delivering a timid margin outlook for Fiscal Q1 quarter will be the main factor impacting investor sentiment this time. But it is a good idea to keep track of content expenditures, considering this pivotal moment in the video streaming space.
All Eyes Are on NFLX’s Subscriber Growth and Ad Tier Plans
In my view, the bullish case for NFLX in Q4 hinges on the stock price being supported by continued strong user growth and progress in its ad tier plans.
As of Q3 2024, Netflix’s total subscriber base hit 282.7 million, an increase of 35.6 million compared to the same period last year. In the first three quarters of Fiscal 2024 alone, Netflix added 22.5 million new subscribers. The biggest driver of this growth has been the EMEA region, which now accounts for 34% of total subscribers (96.1 million), with North America following closely behind at 30%, or 84.8 million subscribers.
For Q4, Netflix expects even higher paid net additions compared to Q3, driven by seasonal factors and a strong content lineup, including Squid Game season two, the Jake Paul vs. Mike Tyson fight, and two NFL games on Christmas Day.
However, the real focal point will be Netflix’s advertising business and its efforts to improve offerings for advertisers. The company’s lower-priced ad tier, which at $6.99 is the most affordable of all streaming services, now accounts for over 50% of sign-ups in ad-supported countries. Membership in the ad plan also grew 35% quarter-over-quarter, demonstrating how Netflix has successfully scaled its ad business and built a solid base of members in this tier. If these trends continue, it could be a major factor in surpassing the company’s Q4 guidance.
Netflix Offers Opportunities amid Market Corrections
Another reason I see Netflix as a solid buying opportunity ahead of its Q4 earnings is the recent pullback in its stock price. I believe this dip is more driven by macroeconomic factors than by concerns over Netflix’s subscriber growth or its new growth drivers. With the possibility of a more hawkish Fed in 2025, the S&P 500 (SPY) has been losing support since mid-December last year, and Netflix, with a beta of 1.32, tends to move in sync with broader market trends.
I’m not going to try to predict Netflix’s full-year numbers for 2024, but from what I can tell, the company is well-positioned to report strong Q4 results. These results could help reinforce the idea that Netflix’s renewed growth paths (ad tier and paid sharing) remain promising, even in an increasingly-crowded video streaming market.
Meanwhile, Netflix is currently trading at a P/E ratio of 41.5x for the full year of 2024, which is about 6% below its five-year historical average. When long-term growth is considered, the company’s expected EPS CAGR (Compound Annual Growth Rate) for the next three to five years is 25.6%. This results in a PEG ratio of 1.63—while not exactly a bargain, it’s a fair premium, in my view, given that Netflix is the most valuable media company in the world and is likely to stay that way.
Is NFLX Stock a Good Buy?
At TipRanks, NFLX is rated as a Moderate Buy, with 22 out of 34 analysts holding a bullish view on the stock. Ten analysts are neutral, and just two are bearish. The average NFLX price target among them is $930.37, which suggests a potential upside of 12.31% from its current price.
Key Takeaway
I rate Netflix as a Buy ahead of its Q4 earnings, as it’s more inclined to reaffirm continued success with its content strategies that boost user engagement and drive growth, rather than the other way around. The company’s advertising pricing strategy remains ultra-competitive and should become a significant revenue contributor in 2025. This, in turn, should help reduce churn and allow Netflix to exceed its guidance moving forward.
