Analyzing Netflix’s Upcoming Earnings: Significant Free Cash Flow Growth in Focus

As Netflix (NASDAQ:NFLX) gears up to release its first quarter financial results for 2024 after market close on Thursday, April 18th, 2024, the spotlight is on its remarkable improvement in free cash flow and the implications for its stock valuation.

The previous quarter ended December 31, 2023, was a pivotal moment for Netflix, with the company reporting an unexpected surge in subscribers—13.2 million additions compared to the forecasted 8.8 million. This growth included a significant contribution from the traditionally slower-growing regions of the US and Canada, which added 2.8 million subscribers. Following these results, Netflix’s stock experienced a significant rally, and earnings per share (EPS) and revenue estimates for 2024 and 2025 were adjusted upwards.

However, the recent flurry of analyst upgrades for Netflix has me slightly concerned. Typically, more subdued expectations provide a cushion against potential downturns for growth stocks, and heightened optimism can sometimes lead to sharp corrections post-earnings if results fail to exceed the already high expectations.

From a historical perspective, Netflix’s stock found its nadir in mid-2022, trading between $160 and $170. Around the same time, the company’s fundamentals began showing signs of recovery. Since then, the stock has rebounded to over $600, driven by improved subscriber growth, the implementation of ad tiering, crackdowns on password sharing, and a new partnership with WWE’s RAW—Netflix’s initial venture into live sports broadcasting.

Despite these positive developments, the rise in Netflix’s EPS estimates has been slower than expected, especially for 2024 and 2025. Nonetheless, revenue trends are showing healthier growth, particularly for 2025.

One of the most impressive aspects of Netflix’s recent performance is the significant improvement in free cash flow, enhancing the quality of its earnings. Here’s a brief overview of the free cash flow improvements since the stock bottomed out in mid-2022:

December 2023: $6.9 billion
September 2023: $5.7 billion
June 2023: $4.26 billion
March 2023: $2.86 billion
December 2022: $1.4 billion
September 2022: $523 million
June 2022: ($54 million)
March 2022: ($172 million)

This surge in free cash flow is supported by stable capital expenditures and a dramatic increase in cash flow. Remarkably, despite trading at a high multiple of 100x to 125x cash-flow when near its lowest share price, Netflix’s valuation has become more grounded, now trading at approximately 34x to 35x free cash flow as of the end of 2023.

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Looking ahead, Netflix faces its next major test with its upcoming earnings report. While the company continues to innovate and expand, particularly in the realm of live sports and advertising, the stock’s reaction to the earnings report remains uncertain, with potential fluctuations influenced by management’s outlook and ongoing subscriber growth.