Netflix (NFLX) is one of the most watched stocks by Zacks.com visitors in recent times. So it might be a good idea to look at some of the factors that could affect the stock’s short-term performance.
Shares of the Internet video service have returned -5.5% over the past month, compared with the +0.6% change in the Zacks S&P 500 composite. The Zacks Broadcast Radio & Television industry, which includes Netflix, has lost 3.7% in that time. Now the key question is: where could the stock be headed in the near term?
Although media reports or rumors about a significant change in a company’s business prospects usually cause its stock to trend and result in an immediate price change, there are always some fundamental factors that ultimately determine the buy-and-hold decision.
At Zacks, we prioritize evaluating the change in a company’s future earnings projection above anything else. Indeed, we believe that the present value of its future earnings streams is what determines the fair value of its shares.
We essentially look at how the sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates rise for a company, the fair value of its shares rises. A fair value above the current market price attracts investor interest in purchasing the stock, causing its price to rise. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
Netflix is expected to post earnings of $0.55 per share for the current quarter, representing a year-over-year change of +27.9%. Over the past 30 days, the Zacks Consensus Estimate has remained unchanged.
The consensus earnings estimate of $2.53 for the current fiscal year indicates a year-over-year change of +27.8%. This estimate has changed by +0.6% over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $3.21 indicates a +26.9% change from what Netflix was expected to report a year ago. Over the past month, the estimate has changed by +0.6%.
Backed by a strong external audit history, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock’s near-term price direction because it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, as well as three other factors related to earnings estimates, Netflix has a Zacks Rank #3 (Hold).
The chart below shows the change in the company’s 12-month consensus EPS estimate:
Consensus 12-Month EPS Estimate for NFLX
While a company’s earnings growth is arguably the best indicator of its financial health, not much happens if it can’t grow its revenue. It is almost impossible for a company to grow profits without increasing revenue for long periods of time. It is therefore crucial to know a company’s potential revenue growth.
In the case of Netflix, the consensus sales estimate of $11.97 billion for the current quarter indicates a year-over-year change of +16.8%. Estimates of $45.1 billion and $50.99 billion for the current and next fiscal years indicate changes of +15.6% and +13.1%, respectively.
Netflix reported revenue of $11.51 billion during the most recent reported quarter, representing a year-over-year change of +17.2%. An EPS of $0.59 for the same period, compared to $0.54 a year ago.
Compared to the Zacks Consensus Estimate of $11.52 billion, the reported earnings came as a surprise of -0.12%. The EPS surprise was -14.8%.
Over the past four quarters, Netflix has exceeded consensus EPS estimates three times. The company has only topped consensus revenue estimates once during this period.
No investment decision can be effective without taking into account the valuation of a security. Whether a stock’s current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects is a determining factor in its future price performance.
Comparing the current value of a company’s valuation multiples, such as its price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical values helps determine whether its stock is fairly valued, overvalued or undervalued, while comparing the company against its peers on these metrics gives a good idea of the reasonableness of its stock price.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays attention to traditional and unconventional valuation metrics to grade stocks from A to F (an A is better than a B; a B is better than a C; and so on), is very useful in identifying whether a stock is overvalued, fairly priced, or temporarily undervalued.
Netflix is rated D on this front, indicating that it trades at a premium to its peers. Click here to see the values of some of the valuation metrics that led to this rating.
The facts discussed here and plenty of other information on Zacks.com could help determine whether it’s worth paying attention to the market buzz surrounding Netflix. However, its Zacks Rank #3 suggests that it could move in line with the broader market in the near term.
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This article was originally published on Zacks Investment Research (zacks.com).
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