Netflix's Third-Quarter Results Exceeded Expectations. But Is the Stock a Buy?

Streaming giant Netflix (NASDAQ: NFLX) has one of the most followed earnings releases. It gets more-than-average attention because Netflix reports early in each earnings cycle, but it also gets notice because it's a huge, consumer-facing company that many investors also likely subscribe to.

When the company's third-quarter 2024 results were released after the market closed on Thursday, investors liked what they saw, and shares jumped 11% on Friday. After Friday's stock pop, Netflix shares ended the trading week at $763.89, a new all-time high. This might have investors wondering if now is a good time to buy shares, or if they might have missed the opportunity. Let's dig into the quarter's results and, more importantly, what they mean for the future.

Exceeding expectations

When Netflix set its Q3 2024 outlook in July, the company guided for year-over-year revenue growth of 14% and for paid net additions to be lower than in Q3 2023. The lower number of paid net additions made sense considering the company would face a tough comparison with Q3 2023, which was the first full quarter of paid sharing. Average revenue per membership (ARM) was also expected to be flat year over year.

Reported results were pretty close to what the company guided for. Revenue increased by 15%, beating internal estimates by 1%; paid net additions were 5.1 million, compared to 8.8 million in the prior-year quarter, and ARM was flat. So why did the stock pop so much? Because Netflix beat Wall Street's estimates for both revenue and earnings per share. Analysts expected $9.77 billion in revenue and earnings per share (EPS) of $5.13. Netflix exceeded both of these estimates and also raised full-year guidance, a tried and true recipe for a stock pop.

Growing profitably

Netflix has been prioritizing growth that is also profitable. The company uses revenue as its proxy for growth, and operating margin to demonstrate profitability. Both of these metrics are heading in the right direction. For the full year 2024, Netflix expects revenue growth to be 15% and operating margin to be 27%.

The operating margin is what should be most interesting for investors. A full-year operating margin of 26% would be a significant increase over either of the last three fiscal years.

Source: Netflix. FY = fiscal year.

This matters to investors because this large increase in operating margin means that Netflix now has a little more space to invest back into the business without sacrificing too much profitability. This is the balance the company is trying to strike as it plans for the future.

So is Netflix a buy?

From late 2021 through mid-2022, Netflix's share price fell steeply as investors were shaken out of the stock by worries about the increasing competition and slowing user growth. Several changes, such as paid password sharing and the introduction of a lower-priced membership with advertisements, have reinvigorated the company's growth trajectory and helped drive higher profits and cash generation.

But investors need to be looking toward the future. Fortunately for Netflix, the future still looks pretty bright. Both revenue and paid memberships have consistently grown in the mid-teens percentage each quarter over the past year, and the company is staving off competition and holding on to its spot as the top streaming platform.

Investors should take note of the valuation. Netflix currently trades for a price-to-earnings (P/E) multiple of 43, which is a premium valuation. However, Netflix's three-year median P/E ratio is 40, and its five-year median P/E ratio is 47. So today's price might be an all-time high, but it's historically in line with where Netflix is typically valued.

The business results warrant buying shares today, but it also might be worth keeping an eye on the stock for more opportunistic buying opportunities down the road.

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Jeff Santoro has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.