The S&P 500 companies are poised for their fifth consecutive quarter of profit growth, with analysts predicting a 4.1% increase in earnings for the third quarter. As we enter earnings season, Netflix, Inc. (NFLX) stands as the first major player in the communication services sector to report, with its results slated for release after the market closes on Thursday.
Deepwater Asset Management’s Gene Munster, a prominent figure in the tech investment world, has shared his insights on Netflix’s anticipated performance. In a recent post on X, Munster highlighted the remarkable surge in Netflix’s share price, which has climbed 142% since the “Magnificent 7” tech stocks became the benchmark for investment in January 2023. This surge has propelled Netflix’s stock close to its all-time high.
During the same period, the Magnificent 7 group as a whole witnessed a 244% rally. Excluding Nvidia, the group’s gains have been more moderate, reaching 140%. Munster attributes Netflix’s impressive rebound to the company’s successful password crackdown, which commenced in May 2023. This initiative, according to Munster, has fueled Netflix’s growth, accelerating it from 4% in the March quarter of 2023 to a robust 17% in the June quarter of 2024.
Consensus Call and Growth Projections
Analysts anticipate Netflix to report earnings per share of $5.11 and revenue of $9.764 billion for the third quarter, according to Benzinga Pro data. These figures represent a substantial increase compared to the year-ago earnings of $3.73 per share and revenue of $8.54 billion.
While the Street forecasts a 14% growth rate, Munster believes this estimate might prove slightly conservative, particularly as the comparison periods become more challenging starting with the September quarter. Looking ahead, Munster anticipates 2025 to be a more demanding year for Netflix, leading him to view the current consensus growth forecast of 12% as potentially at risk.
His projection is grounded in the belief that Netflix’s core business growth, excluding the one-time benefits of the password crackdown and the launch of new offerings, is likely to fall within the 5-10% range. Notably, Munster expects Netflix to refrain from providing guidance for the following year during its earnings report this week.
AI’s Impact: Opportunity Cost and Potential Concerns
Munster acknowledges that while generative AI is poised to reduce production costs and enhance margins for Netflix, he expresses concerns about the company’s relatively modest exposure to this transformative AI paradigm compared to other tech giants like Google ($GOOG), Meta ($META), Apple ($AAPL), Tesla ($TSLA), TSMC ($TSM), and Microsoft ($MSFT).
This “opportunity cost” represents a potential risk factor for Netflix, as it could lag behind its peers in leveraging the full potential of AI-driven innovation. As we approach Netflix’s earnings report, investors and analysts will closely scrutinize the company’s performance and its strategic approach to navigating the evolving landscape of AI and its impact on the entertainment industry.