Shares of online streaming giant, Netflix (NASDAQ: NFLX) rose over 7% last week to currently trade at a market cap of $160 billion. NFLX stock, in fact, rose more than 9% in a single trading session last Thursday after the company stated that its ad-supported tier has attracted five million monthly active users since launch, with 25% of new subscribers signing up for this plan.
Introduced in late 2022 by Netflix, the ad-supported pricing plan aimed to increase the subscriber count higher and drive revenue growth.
The COVID-19 pandemic allowed Netflix to gain subscribers at a rapid pace. But the reopening of economies resulted in a deceleration of subscriber count, sales, and earnings which meant the shares of the streaming leader fell from $700 in late November 2021 to $175 in June 2022.
Several online media companies such as Comcast (NASDAQ: CMCSA), Warner Bros. Discovery (NASDAQ: WBD), and Disney (NYSE: DIS) have announced ad-supported plans to improve profit margins and retain subscribers.
Netflix’s ad -tier in the U.S. costs $6.99 per month, which is cheaper compared to similar plans offered by Disney+ and Hulu. The streaming giant also confirmed it may offer multiple ad-based plans in the future.
Shares have more than doubled in the last year but still trades 46% below all-time highs.
Is Netflix stock a buy, sell or hold?
In the first quarter of 2023, Netflix reported sales of $8.16 billion, an increase of 3.7% year over year. In Q1 of 2022, the company grew sales by almost 10% year over year. Its operating income stood at $1.71 billion, indicating a margin of 21%, which is lower than the 25% reported in the year-ago period.
A deteriorating profit margin meant Netflix reported earnings of $2.88 per share in Q1, compared to $3.53 per share in the prior-year quarter. However, its free cash flow rose to $2.1 billion from $802 million in this period.
Netflix continues to invest in original content to improve user engagement and retention as well as drive acquisition rates higher. According to various third-party sources, it remains one of the leaders in terms of streaming engagement.
From its humble beginnings as a DVD rental service to its current global dominance in video-on-demand streaming, movies and TV shows have always been Netflix's core focus. However, in recent times, the company has set its sights on another facet of entertainment—the world of video games.
In November 2021, Netflix introduced a collection of iOS and Android games exclusively available to its subscribers. Although the response was relatively subdued, with less than 1% of subscribers engaging with the games, Netflix remains committed to this endeavor.
The streaming giant has now revealed plans to venture into cloud gaming, allowing users to stream games directly to their devices through an internet connection. This signals Netflix's long-term dedication to expanding its presence in the gaming industry.
A report from Grand View Research states the global video game industry might surpass $500 billion in 2030, up from $200 billion in 2021, providing Netflix an opportunity to unlock another multi-billion-dollar revenue stream.
What next for NFLX stock price and investors?
Analysts tracking Netflix expect its sales to decline by 1.2% to $31.2 billion in 2023 and increase by 12.2% to $35 billion in 2024. Its adjusted earnings are forecast to rise from $9.95 per share in 2022 to $13.15 per share in 2024.
So, NFLX stock is priced at 36 times forward earnings and five times forward sales which is quite steep given its growth forecasts.
Analysts have a 12-month price target of $333 for NFLX stock which is much lower compared to its current trading price.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
