[Click e-Stock] "Netflix Growth Slowing? ... Valuation Discount Excessive"

Focus on Whether Third-Quarter Revenue Growth Falls into Single Digits
Daishin Securities Maintains "Buy" Rating

As Netflix's revenue growth continues to slow, analysts have said the recent valuation discount has become excessive.

On Oct. 12, Cho Jaewoon, an analyst at Daishin Securities, said, "What the market is focused on is not the earnings figures, but the pace of the slowdown in growth," adding, "Since the stock price has already reflected much of the growth deceleration, valuation concerns have eased significantly." He maintained his "Buy" rating.

Growth Drivers Shift to Advertising and Price Hikes... Third-Quarter Results Expected to Meet Company's Guidance

Netflix will report its third-quarter results on Oct. 21. The company has recorded year-over-year revenue growth in the double digits for 16 consecutive quarters, but the rate has gradually slowed from 17.6% to 16.2% and then 13.4%. Its third-quarter revenue growth guidance is 11.7% year over year.

As the impact of its crackdown on account sharing, which previously fueled growth, has waned, its advertising business and price hikes are now driving growth. Netflix has set a target of $3 billion in annual advertising revenue, about double the prior year's figure. The third quarter is the first quarter in which U.S. price increases will be reflected for the entire period, and it is also when the company's U.S. National Football League (NFL) broadcasts begin.

Cho said, "The key point in this report is not whether revenue exceeded guidance, but whether there are signs that the growth rate will fall into single digits." He added, "We also need to consider the structural trade-off whereby revenue per subscriber on the ad-supported plan is lower than on the standard plan, so expanding the share of advertising dilutes average revenue per subscriber."

Operating Margin Holds Firm in the 33% Range... 12-Month Forward P/E at 19.9x, a 39% Discount

Netflix shares have fallen more than 24% over the past three months, bringing its 12-month forward price-to-earnings ratio (P/E) down to 19.9x. This is a 39% discount to its five-year average P/E of 32.4x.

Profitability metrics stand out. Netflix's operating margin in the second quarter was 33.4%, above the company's full-year target of 31.5%. With the burden of content amortization expected to ease in the second half of the year, analysts assess that the risk of a sharp decline in margins is limited.

The market consensus for the third quarter is revenue of $12.56 billion, earnings per share (EPS) of $0.80, and operating income of $4.19 billion. The company's guidance is revenue of $12.86 billion and EPS of $0.82.

Ultimately, the market's attention is on the fourth-quarter outlook, which will be released alongside the earnings report. Sentiment remains cautious, with Morgan Stanley and Barclays lowering their price targets to $80 and $70, respectively, but some analysts say the current discount on the stock is excessive.

Cho added, "The current discount is excessive. The fact that the downward trend in growth has yet to reach a confirmed bottom limits conviction, but the tone of the fourth-quarter guidance will determine the direction of any stock re-rating."

This content was produced with the assistance of AI translation services.