ii view: Netflix stock rallies after return to net new subscriber growth

This major content streamer is launching a new service and plans to monetise password sharing next year. Buy, sell, or hold?

Third-quarter results to 30 September

• Added 2.41 million net new subscribers to a total of 223.1 million
• Revenue up 6% year-over-year to $7.93 billion
• Earnings per share down 3% to $3.10

Guidance:

• Expects net new subscribers of 4.5 million during the fourth quarter

ii round-up:

Media streamer Netflix Inc (NASDAQ:NFLX) detailed a return to subscriber growth during its third quarter with net new customers of 2.41 million exceeding its own prior forecast for growth of a million. 

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Both revenues and earnings beat Wall Street forecasts, aided by the better-than-expected subscriber adds. Management now forecasts net new fourth-quarter subscribers of 4.5 million as it prepares to launch its new lower priced ad-supported plan across 12 countries in November. 

Netflix shares rallied by more than 12% in after-hours US trading having come into this latest announcement down around two-thirds year-to-date. Shares for rival streamers Walt Disney Co (NYSE:DIS) and Prime owner Amazon (NASDAQ:AMZN) are both down nearer a third during 2022, similar to the Nasdaq Composite index. 

Aided by shows such as series four of ‘Stranger things’ and ‘Purple Hearts,’ most of Netflix’s new subscribers during the quarter came from its Asia Pacific business, which totalled 1.43 million. New members for its home North American division came in at 100,000.  

The Californian headquartered company also detailed plans to potentially cash in on customers sharing passwords. In 2023, it plans to offer the ability for borrowers to transfer their Netflix profile into their own account. Password sharers will be able to create sub-accounts helping them pay for family or friends if they wish to.

Broker Morgan Stanley retained its ‘equal-weight’ rating on the shares following the results, although raised its estimate of fair value to $250 per share from $230 per share. 

ii view:

Founded in 1997, Netflix today employs over 10,000 people. A producer of content, its popular programmes have included Squid Game, Breaking Bad, Bridgerton and The Witcher. It operates across four key regions: UCAN (the United States and Canada), EMEA (Europe, Middle East, and Africa), LATAM (Latin America), and APAC (Asia Pacific). In 2021, more than 90% of its net new subscribers came from outside of its North America home  market. 

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For investors, elevated inflation and a cost-of-living crisis may see many households make savings, with cuts to non-essential entertainment services such as Netflix a possible candidate. Competition from the likes of Walt Disney remains high, while unlike rivals such as Apple Inc (NASDAQ:AAPL) and Comcast Corp Class A (NASDAQ:CMCSA), Netflix does not pay a dividend. 

More favourably, a new lower cost advertising plan will help ease the cost for subscribers, making it more viable during a cost-of-living crisis. Potential for growth in streaming TV at the expense of more traditional linear TV remains, while Netflix bought video games maker Night School Studios during 2021 and has begun testing an online game offering in selected countries.

On balance, and while some caution remains sensible, the broad trend from linear TV to streaming should at least lend some support to an ongoing recovery from  last year's share price crash.

Positives: 

• Streaming TV services overall still growing
• Potential to add sport content

Negatives:

• Intense competition from Disney, Apple and others
• Subject to currency movements given growing overseas customer base

The average rating of stock market analysts:

Strong hold