Is Netflix Stock a Buy After October Rally?

Netflix NFLX is a pioneer in subscription video on demand and is now the largest online video provider in the world. From its origin in the United States, Netflix expanded rapidly into markets abroad and now has more subscribers outside the U.S. than inside. The company has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material.

Netflix is trialing an ad-supported tier in the fourth quarter into 2023 as it looks to capture potential subscribers who were unwilling pay the ad-free price. While the potential audience could be large, particularly in emerging markets, management will need to ensure that the lower-priced tier doesn’t cannibalize the full-price subscriber base in more saturated markets like the U.S.

Key Morningstar Metrics for Netflix

• Fair Value Estimate: $290
• Star Rating: 3 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable

Economic Moat Rating

Our narrow economic moat rating is based on intangibles resulting from the use of data stemming from Netflix’s massive worldwide subscriber base. Netflix mines this data in order to better purchase and create content. This new content not only strengthens its relationship with its current customers but also attracts new customers via word of mouth and the halo effect from critical acclaim and award nominations. Netflix leverages its data set across its offerings in multiple ways to derive durable competitive advantages.

Read more about Netflix’s moat rating.

Fair Value Estimate for Netflix Stock

Our fair value estimate of $290 per share assumes that Netflix’s domestic paid streaming subscriber count expands only slightly to 76 million in 2026. Price elasticity plays a major role in our fair value estimate. In general, we are skeptical of the claim that pricing increases won’t harm customer counts globally. Due to the additional of lower-priced ad-supported plans and lower prices in markets like India, we expect the global streaming paid subscriber base to expand to 297 million by 2026 from 221 million in 2021. Our domestic subscriber and pricing forecast generates 6% average annual revenue growth between 2022 and 2026, as Netflix benefits from price increases every 18 months.

Read more about Netflix’s fair value estimate.

Risk and Uncertainty

The move to relying on original content has added costs and risks. Netflix now depends heavily on its ability to find and create compelling new original programming with relatively tight schedules on an ongoing basis. If this pipeline falters, subscribers could bolt to competitors. Netflix’s expansion outside the U.S. could continue to drag on margins because of different tastes and lower pricing. And increasing the subscription price in mature markets could limit growth and increase churn. While the introduction of ads could help Netflix attract and increase revenue from price-sensitive consumers, it could also dilute the company’s brand equity with users.

Read more about Netflix’s risk and uncertainty.

Netflix Bulls Say

• Netflix’s internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire.
• Netflix has built a substantial content library that will benefit the company over the long term.
• International expansion offers attractive markets for adding subscribers.

Netflix Bears Say

• The company continues to burn billions of dollars of cash to create its original content, with no end in sight.
• The level of competition in the U.S. and internationally is increasing and will continue to do so in the near future. Disney+ launched its own branded SVOD service in the second half of 2019.
• The need for increased content and marketing spending outside the U.S. will limit the rate of margin expansion for the international segment.

Remove the guesswork and make informed decisions faster. Morningstar Investor’s stock ratings, analysis, and insights are all backed by our transparent, meticulous methodology. Learn more and start a seven-day free trial today.