Stellar Netflix Earnings Show Durable Strengths, But Some Tailwinds Will Fade

Our thoughts on Netflix’s earnings for the first quarter

(CTN News) – As a result of a big jump in new subscriber additions, Netflix has had a very strong third quarter. The margins, cash flow, and other underlying trends that we see in Netflix’s business were equally important in supporting the long-term strength we can see in the company.

There are a few reasons to be optimistic about Netflix’s fourth quarter, which is expected to be similarly strong.

As a result, we are raising our fair value estimate for stock to $350 from $330, but we believe that the 12% spike in reaction to the company’s earnings was a little overexcited on the part of the market.

The subscriber growth rate is expected to moderate in 2024, and if the actors’ strike ends in some form, there will likely be a big increase in cash content spending in 2024 as a result of the end of the strike.

A strong subscriber growth of 8.8 million net additions in the quarter, the best result since the second quarter of 2020, was attributed to pandemic-related lockdowns and spiked revenues of 8% over last year.

There were no significant changes in average revenue per member, or ARM, in each of its four regions except for Latin America, which management attributed to the introduction of the lower-cost ad tier, the lack of a broad price increase over the past 18 months, and a shift in the plans available to customers.

There is a growth in Netflix’s ad revenue contribution

Netflix has announced price increases in several major markets over the upcoming few years, including on the basic and premium plans in the United States, which we believe will boost ARM over the next few years.

It is also expected that advertising revenue will contribute more to the bottom line of the company. In countries where Netflix’s ad tier was available, 30% of Netflix’s new subscribers were on it during the first quarter.

However, Netflix is still building out its ad infrastructure, including targeting and measurement, which should ultimately result in much higher ad revenues per subscriber.

We believe that the revenue drivers lend operating leverage to the firm as its operating margin continues to ramp up-to 22% this quarter and expected to be between 22% and 23% in 2024.

In addition to the development of the advertising capabilities, we expect the resolution of the writers’ strike and, eventually, the actors’ strike will result in higher costs.

The pace of subscriber growth will also slow materially, although tailwinds may persist into next year. Netflix has provided price-sensitive subscribers who were already using Netflix without paying with opportunities as a result of the password crackdown and low-cost advertising tier.

In the next year or so, we expect that the tailwind for new subscribers will subside once paid sharing options are introduced to all accounts. Meanwhile, Netflix expects a similar strong fourth quarter for new subscriber additions across all geographies.

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