Fair value estimate: Is Netflix’s stock overvalued?

A review of the latest fair value estimations for Netflix and the factors contributing to these valuations

By Nadia Elbilassy | @Nadia Elbilassy | 31 August 2023

  • Netflix has been given new fair value estimates, indicating that the stock is currently overvalued in the market

  • Q2 earnings report was a disappointment as Netflix's revenue fell slightly short of market forecasts, despite a small increase compared to the second quarter of the previous year

  • Netflix's global paid subscribers rose to 238.4 million, and the company predicts continued subscriber growth through the rest of the year, driven by its strategy to limit password sharing

Fair value estimates for Netflix

Finance Charts has provided a fair value estimate of $315 for Netflix, based on the scenario in which the company's domestic paid streaming subscriber count experiences a modest growth to 76 million by 2027.

Conversely, alternative market sources suggest a fair value estimate of $392, which fairly closely aligns with the current stock value of $408. In both cases, Netflix stock is currently overvalued.

A fair value estimate refers to an assessment of the asset’s intrinsic value and it can be done by analysing several factors including company earnings, growth potential and economic conditions. Fair value estimate helps investors to decide whether a stock overvalued, undervalued, or priced fairly.

Amid intense market competition and slowing revenue growth, as evidenced by its Q2 earnings report, Netflix's valuation has received significant attention due to its prolonged overvaluation.

While the streaming service managed to achieve a 2.7% increase in quarterly revenue in the second quarter compared to the same period last year, resulting in a total of $8.2 billion, this figure fell short of the $8.3 billion that analysts had anticipated.

The company's stock price fell significantly, nearly 9% on the day of the earnings release, especially due to the prospect of another anticipated decline in the upcoming Q3 earnings report.

Company’s predictions for the rest of the year

Netflix's projection for third-quarter revenue stands at $8.5 billion, which is notably lower than Wall Street's prior forecast of $8.7 billion. This difference in revenue outlook has contributed to a subdued sentiment in the market, primarily due to the predicted slower growth.

Figuratively, the streaming service has generated over $16.349 billion in revenue in the first two quarters of 2023 and has experienced positive outcomes from implementing a strategy to curb password sharing. Netflix is extending this initiative to more than 100 countries, including the US.

At the end of the Q2, Netflix had 238.4 million paid subscribers worldwide, up from 232.5 million in the previous quarter and 220.7 million in the same period last year. The growth in customer numbers throughout the quarter was distributed evenly across all four geographical regions, with Europe emerging as the leader in this regard.

The streaming service foresees ongoing growth in its subscriber base for the rest of the year, propelled by its paid sharing initiatives that are set to be implemented in all countries.

However, Netflix's outlook for Q3 appears slightly subdued due to its projection of lower revenues and the substantial rise of prominent content platforms like Disney and Prime. As a result, the overall outlook for Netflix in Q3 is tinged with a touch of caution.