Netflix Earnings Preview: Strong Momentum But Higher Valuation
With the continued reduction in the proportion of costs and expenses contributing to operational leverage, Netflix's profitability is expected to maintain high growth. However, the current high valuation at a dynamic 42x P/E ratio makes this a challenging investment decision.
Core Focus: What Is the Market Watching?
– Net Profit Growth Continues to Outpace Revenue
Consensus estimates project revenue of approximately $11.04 billion, marking a 15.5% increase YoY, and a EPS of 7.06, up 44.8% YoY. The company still targeting a 29% operating margin for 2025 in Q1 based on F/X rates as of January 1, 2025.
– Advertising Maintains Strong Momentum
Without subscriber and ARPU data, it's hard to see what could slow Netflix's current growth. Attention will likely shift to next year's outlook. To maintain growth, ad revenue will need to significantly increase. Netflix launched its in-house ad platform in the US in April and will expand it globally. This platform is crucial for Netflix's long-term advertising strategy and will enhance measurement.
Netflix currently doesn't disclose specific figures for its advertising revenue. However, in its Q1 shareholder letter, the company projected that ad revenue would double this year. Any more optimistic guidance in Q2 could potentially be seen as positive news for the stock. Bloomberg analysts previously estimated that ad revenue would account for approximately 7% of Netflix's total revenue for the year.
– Impressive Content Pipeline for 2H
Netflix executives characterized their 2H content lineup a "slight embarrassment of riches," with three top series set to launch between late June and year-end. "Squid Game" finale's June 27 release kicks off Netflix's powerhouse content period, with new seasons of "Wednesday" and "Stranger Things" following in 2H. Along with live events like the NFL, WWE and Taylor vs. Serrano 3, these blockbusters can drive subscriber gains, deepen customer engagement and boost ad revenue.
Options Market Signals
From an options perspective, despite a high Open Interest (OI) put/call ratio of 1.25—which indicates strong pessimistic or hedging sentiment in the market—the Implied Volatility (IV) Rank stands at 37. This suggests that the cost of purchasing options to position for future significant price swings is currently at a relative historical low.
Summary of Risks and Opportunities
– Potential Positive Catalysts: Price Increases; Advertising Revenue Grows Beyond Expectations.
– Risks to Monitor: Relatively High Valuation.
– Valuation: Netflix currently trades at a P/E multiple of 59.03x, and Forward P/E around 42x.
Barclays projects mid-teens revenue growth next year with a 200bps margin expansion. This implies 4-5% higher 2026 EBITDA than consensus. At this rate, Netflix's valuation would be ~33x 2026E EBITDA, still exceeding most peers.
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