Key Points
Netflix shares fell after investors were disappointed that the company didn't increase guidance.
The video streaming giant is slowly turning from a high-growth company into a cable-like utility.
The share price of Netflix (NASDAQ: NFLX) sank despite the video streaming company reporting strong first-quarter results, after it only maintained its full-year guidance. The stock has been on a roller-coaster ride following its planned acquisition of Warner Bros Discovery, which initially sank the shares, but then the stock reversed course after Netflix got outbid. The stock is now around breakeven over the past year, as of this writing.
The $2.8 billion termination fee Netflix received from Warner Bros for the deal falling through did little to soothe investors' concerns about its guidance, as the company said it would still incur much of the transaction costs related to the deal and that it still expected high content costs early in the year. The company projected 13.5% revenue growth in Q2 and between 12% and 14% revenue growth for the year to between $50.7 billion and $51.7 billion. It noted that the guidance included planned price increases.
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That's a deceleration from the over 16% revenue growth the company saw in Q1. Netflix said the growth came in above expectations due to stronger-than-expected membership growth. Growth was strongest in international markets, with Asia Pacific revenue climbing 20% to $1.5 billion; Latin American revenue rising 19%; and EMEA (Europe, Middle East, and Africa) revenue jumping 17% to $4 billion. U.S. and Canada revenue rose 14% to $5.2 billion.
Netflix said it is seeing strong momentum in its ad business, with 60% of all new members in countries that offer an ad-tier choosing this option. It continues to expect its ad revenue to double this year to around $3 billion. It's been adding new advertisers, and its live event programming has also seen big viewership.
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Should investors buy the dip?
Netflix still believes it has a big opportunity in front of it, saying it is less than 45% penetrated among global households that have broadband. However, what we don't know is the income, language barriers, and whether they are desirable households for advertisers. Ultimately, Netflix likely evolves into a cable-like utility itself, combining subscriptions and advertising. That may not sound exciting, but it's still an attractive, compounding business model.
Trading at a forward price-to-earnings ratio (P/E) of around 30.5 times 2026 analyst estimates, the stock isn't cheap. That's a similar multiple to Apple, which has a similar strong compounding business, but which is relatively capital light because it doesn't have to spend big on content each year. As such, Netflix isn't a stock I'm chasing even after this pullback.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Netflix, and Warner Bros. Discovery and is short shares of Apple. The Motley Fool has a disclosure policy.
