ii view: Netflix upgrades outlook as profits boom

Responsible for hit shows such as Bridgerton and Baby Reindeer, and with live sport now firmly in its sights. Buy, sell, or hold?

19th July 2024 12:09

by Keith Bowman from interactive investor

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Second-quarter results to 30 June

Added 8 million net new subscribers to a total of 277.65 million
Revenue up 17% year-over-year to $9.5 billion
Earnings per share (EPS) of $4.88, up from $3.29 per share

Guidance:

Now expects full-year revenue growth of 14-15%, up from a previous 13-15%
Now expects a full-year operating profit margin of 26%, up from 25%

ii round-up:

Streaming giant Netflix Inc (NASDAQ:NFLX) added 8 million net new subscribers during the second quarter, including a one-third increase in lower cost ad-supported memberships, taking its overall customer base to 277.65 million.

That beat Wall Street estimates of 274 million and helped drive earnings to $4.88 per share, up from last year’s $3.29 and exceeding analyst forecasts of $4.74. Revenue climbed 17% year-over-year to $9.5 billion, and Netflix now expects annual revenue growth of between 14% and 15%, up from a previous 13% to 15%.

Shares in the Nasdaq 100 company fell 2% in afterhours US trading having come into this latest news up by close to a third year-to-date. That’s comfortably ahead of a 7% gain for rival streamer The Walt Disney Co (NYSE:DIS) and in contrast to an 8% fall for Sky TV owner Comcast Corp Class A (NASDAQ:CMCSA). The tech-heavy Nasdaq 100 index is up 19% so far this year.

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Netflix introduced a new cheaper ad-supported $6.99 per month subscription just 18 months ago. New customer sign-ups for the ad-supported service came in at 45% of total new business during the quarter.

The streamer’s ad-free $11.99 per month service in the US and France is now to be withdrawn, a move which follows its previous removal in the UK and Canada.

Aided by such service changes, Netflix now expects a full operating profit margin of 26%, up from management’s previous estimate of 25%.

Current third-quarter revenues are expected by management to grow by around 14% year-over-year to $9.7 billion, taking earnings per share to around $5.10, up from $3.73 in Q3 2023.

Given the streamer’s greater focus on revenue and earnings, Netflix previously highlighted its intention to cease reporting customer subscription numbers come 2025.

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, flagging an estimated fair value of $780 per share.

ii view:

Started in 1997, Netflix today streams its TV and movie content to more than 190 countries. Headquartered in California, North America continues to generate its biggest slug of revenues at around 45%, followed by Europe, the Middle East, and Africa at 31%, Latin America 13% and Asia Pacific the balance of 11%. Rivals include Amazon.com Inc (NASDAQ:AMZN) and its Prime media service, along with YouTube and Google owner Alphabet Inc Class A (NASDAQ:GOOGL) and Apple Inc (NASDAQ:AAPL).

For investors, the tough backdrop for consumer spending and including high borrowing costs cannot be overlooked. Competition remains intense, a move to exclude customer subscription numbers arguably reduces investor transparency, while unlike competitors such as ITV (LSE:ITV), Comcast and Apple, Netflix does not currently pay a dividend.

To the upside, management moves to reignite growth have proved successful, with operating profit margin at 27% in this latest quarter versus 22% a year ago. A lower-cost plan including ads does ease the cost for financially pressed customers as well as bringing in corporate ad sales. Moves towards live TV audiences have included the purchase of rights to show World Wrestling Entertainment (WWE), while its gaming offering is being linked to successful shows with a multiplayer Squid game to accompany a new TV series.

For now, and despite continued risks, both first-mover advantage and continued momentum away from linear TV towards streaming should please fans of this media giant.

Positives:

Management initiatives like advertising
Geographical diversity

Negatives:

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

The average rating of stock market analysts:

Buy

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