Netflix Lifted Guidance. Is the Stock a Buy Following Its Drop?

Key Points

• Netflix turned in strong results and upbeat guidance.

• However, the stock fell as expectations were high going into the recent report.

• The Netflix story remains unchanged, but the stock's valuation has gotten pricey.

• 10 stocks we like better than Netflix ›

Netflix (NASDAQ: NFLX) once again delivered strong revenue and earnings growth when it reported its Q2 results on July 17, but the stock nonetheless fell on the news. The video streaming company has been a strong performer this year, with the stock up 38% year to date as of market close July 21 despite the pullback. As such, expectations were high going into the report.

A huge market winner over the years, let's see if this pullback could be a buying opportunity, especially after the company raised its guidance.

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Solid growth and upbeat outlook

Netflix said the key to its success is offering a wide array of quality series and films that resonate with its viewers. It noted that a hit show or film typically only accounts for about 1% of total viewing, so it looks for a continuous stream of quality content across regions and genres to keep viewers and bring in new ones.

As an international company, Netflix is also using a "local for local" content strategy to appeal and connect with audiences in their home countries. It said non-English content now makes up more than one-third of its viewing hours. Meanwhile, these shows can also become hits with American audiences, such as Squid Game from Korea, or Japan's Alice in Borderland.

Netflix's investment in local content has been helping drive its results, as international revenue growth has been outpacing U.S. and Canadian growth. This continued in Q2.

Asia-Pacific growth led the way, with revenue climbing 24% to $1.3 billion, while EMEA (Europe, Middle East, & Africa) revenue jumped 18% to $3.5 billion. Latin American revenue rose 9% to $1.3 billion, but was up 23% in local currencies. U.S. and Canada revenue, meanwhile, grew 15% to $4.9 billion.

Netflix's overall revenue rose 16% to $11.08 billion, which was just ahead of the $11.07 billion analyst consensus, as compiled by LSEG. Earnings per share (EPS) soared 47% to $7.19, surpassing the $7.08 analyst consensus.

Most of Netflix's revenue growth currently appears to be coming from price increases and membership additions. However, growing its ad business is a priority. Its ad revenue is expected to double this year, and it recently rolled out its new adtech platform to all of its ad markets.

The company also continues to expand its live programming, including boxing matches and two scheduled NFL games on Christmas. It also has weekly live programming through its broadcast of WWE's Monday Night Raw.

Looking ahead, Netflix guided for Q3 revenue to climb 17% with a 31% operating margin. It said its second-half operating margin will be lower than the first half due to higher content amortization and sales and marketing costs related to its larger second-half content slate.

For the full year, it raised it revenue guidance, taking it to a range of $44.8 billion to $45.2 billion, up from a prior outlook of between $43.5 billion to $44.5 billion. It also increased its operating margin outlook from 29% to 30%. Currency rates are responsible for about half the operating margin increase.

Image source: Getty Images.

Should investors buy the pullback?

Netflix stock had a strong year leading up to earnings, so expectations were high. The company turned in solid results and boosted its outlook, although that was not enough for investors to continue to push the stock higher. The stock is down about 1.6% after the report.

That said, nothing has fundamentally changed with Netflix's story. The company is still benefiting from price increases, while its membership numbers continue to grow, especially in international markets. Meanwhile, advertising should become the company's largest growth driver over time when its ad-tiered plans and live content gain more scale.

However, with the stock trading at a forward price-to-earnings ratio (P/E) of 47 times analyst estimates for 2025, even after the pullback, I would not be a buyer at current levels. I think the stock has solid potential over the long term, but I'd still want a cheaper valuation before I hop on board.

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Geoffrey Seiler 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.