Netflix Earnings: Another Great Quarter, but Growth Has Peaked

Key Morningstar Metrics for Netflix

• Fair Value Estimate: $500.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Netflix’s Earnings

Netflix NFLX reported another outstanding quarter, despite diminishing tailwinds from the crackdown on password sharing and the introduction of ad-supported plans. Revenue growth accelerated, and subscriber additions and margins remained at historic highs. We still believe that recent results represent an especially booming period rather than a durable new norm. However, the firm’s current momentum has lasted longer than we originally anticipated.

We are raising our fair value estimate to $500 per share from $440. We believe the stock is pricing in a continuation of recent trends, and while we maintain that Netflix is best in class, we still expect it to experience slower periods, making the shares overvalued.

Second-quarter sales rose 17% year over year (the best quarterly result since 2021), but this likely represents a peak for growth. The company has now lapped its broader crackdown on password sharing, which we believe is largely responsible for the spike in subscriber additions that began in the middle of 2023 and has continued.

Netflix increased its subscriber base by another 8 million during the quarter, including by 1.5 million in the United States, and it has expanded its subscriber base by nearly 17%, or almost 40 million members, over the past year. Netflix has still not yet cracked down on password sharing across its entire membership base, which is one reason we now expect a longer tail of elevated subscriber additions. Still, we think the biggest boost from a perfect storm of catalysts has passed, especially in the US.

We expect growth in average revenue per member, which has been flat over the past year, to play a bigger role in sales growth in the long term. ARM increased 7% year over year in the US for the second straight quarter but declined in all other regions, mostly due to a combination of currency weakness and a mix shift to lower-priced markets like India.