Netflix, beloved streamer of all things dark and dramatic, saw its third-quarter earnings come in at around $11.5 billion, right in line with analysts’ predictions. Despite this strong financial performance and a robust lineup of shows, Netflix’s shares declined 1.8% in after-hours trading, demonstrating the stock’s sensitivity to investor expectations. Formerly publicly-traded electric vehicle manufacturer Nikola Corporation has seen an over 800% stock surge since the beginning of 2020. It’s up over 360%—which is just incredible. A string of quarterly profit misses over the past few months have spooked investors, leading to a 10% plunge in its stock.
Netflix’s stock decline is especially remarkable, in that it has dropped by more than 16% since peaking in June. Perhaps that’s why so many analysts have expressed alarm over the company’s current valuation, which boasts a forward price-to-earnings multiple near 40. Netflix’s share price has gone up by more than 26% on the year. Along with it came a realization that investors expect the company to continue to outperform, quarter in and quarter out.
Performance and Investor Expectations
For the third quarter, Netflix definitely beat Wall Street’s revenue projections. This performance is a testament to the company’s proven ability to produce income, even when the market goes through bumpy rides. The company had its best ad sales quarter in its history during this stretch. This success comes as Netflix prepares for a lineup of major releases throughout the year-end, including the highly anticipated final season of “Stranger Things.” This year, Netflix will stream two NFL games live on Christmas Day, making the potential for viewer engagement even greater.
Although these are all very positive indicators, analysts remain optimistic but cautious about Netflix’s ability to continue its rapid growth trajectory. Matt Britzman, a senior equity analyst at Hargreaves Lansdown, noted, “Shares have enjoyed a strong run this year, so expectations were already high, and with the valuation sitting above its long-term average there’s added pressure not just to deliver but to exceed.” This feeling is indicative of a deeper anxiety among the entire investor class that wishes for Netflix to deliver on its promises—every time.
Concerns About Valuation and Future Growth
Yet Netflix’s current $125 billion valuation continues to make analysts turn their heads. Everyone agrees the company must prove that its ad-supported program is a path to new growth. This demonstration is critical to explain its lofty (high) stock price multiple. Analysts at Wedbush highlighted this necessity, stating that “Netflix must demonstrate soon that its ad program can accelerate growth to justify a sky-high multiple.”
The absence of a full-year forecast from Netflix just increases the mystery around its competitive positioning in the market. Such omission will give demoralizing investors the impression that the company is being extremely conservative. This may spur new questions around its capacity to drive continued growth in an increasingly competitive streaming marketplace.
Looking Ahead
Those are some of the issues Netflix is looking to address right from the start. It’s been doubling down on its content library and unique ad strategies to win over viewers and advertisers. The efforts are an attempt for the Octopath Traveler parent to build upon its strong franchises, while finding new ways to grow.
