Netflix’s Comeback: Strong Earnings Signal Resilience Amid Market Challenges
Netflix (NASDAQ: NFLX), once a top stock in the tech sector, now faces a different reality. While it used to shine alongside other FAANG stocks, it’s currently absent from the “Magnificent Seven,” a new elite tech roster in today’s market.
After experiencing setbacks as the pandemic slowed, including a dip in subscribers and profits, Netflix has successfully adapted to shifting market conditions. The introduction of an advertising tier, a long-requested feature, provides consumers with a more affordable subscription option while allowing advertisers to access a broad audience. Additionally, Netflix’s crackdown on password sharing has boosted revenue, benefiting profits directly.
Strong Earnings Showcase Growth
Despite its earlier struggles, Netflix recently hit an all-time high following the release of its third-quarter earnings report. The company’s numbers are impressive.
In the last quarter alone, Netflix added 5.1 million subscribers, totaling 35.6 million over the past year. This growth propelled revenue up 15%, reaching $9.83 billion, slightly surpassing estimates of $9.78 billion.
Operating margin, a key profitability measure for Netflix, increased from 22.4% to 29.6%, although this was influenced by the timing of content expenses. Consequently, management raised its full-year operating margin forecast from 26% to 27%.
In terms of earnings, Netflix reported earnings per share (EPS) of $5.40 based on GAAP standards, reflecting an increase from $3.73 a year prior and beating the consensus estimate of $5.16. The company also provided promising guidance for the fourth quarter, forecasting 14.7% revenue growth and EPS of $4.23, both exceeding analyst expectations.
Concerns About Subscriber Growth
Despite the strong financial results, some analysts worry that the growth driven by the crackdown on password sharing might be waning. Subscriber additions, while solid at 5 million, were the slowest seen in the last five quarters.
Image source: Getty Images.
Future Growth Opportunities for Netflix
Valid concerns arise as Netflix has gained nearly 300 million households and could soon reach a limit in its market potential. However, the company hinted at growth opportunities for investors to consider.
In its shareholder letter, Netflix management stated, “We still see plenty of room to increase our margins over the long term.” This is important, especially considering that Netflix has often focused on subscriber growth rather than profitability.
The projected 27% operating margin is noteworthy, but there’s room for significant improvement as Netflix’s subscription model expands. This model provides leverage similar to what companies like Meta Platforms and Alphabet have achieved in digital advertising.
Despite fading advantages from paid sharing, Netflix holds various strategies to grow revenue and expand margins. Its advertising segment is rapidly growing; membership in the ads plan jumped 35% quarter over quarter, with over half of new sign-ups in ad-enabled countries opting for this plan.
Moreover, Netflix is beginning to explore live sports programming, starting with events like the Jake Paul/Mike Tyson fight in November and two NFL games on Christmas Day. Such programming not only boosts margins but also supports potential price increases.
Netflix still has considerable room for growth in its addressable market, and the potential for stock appreciation exists as the business evolves and margins improve.
Is Investing in Netflix a Wise Choice?
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Suzanne Frey, an executive at Alphabet, and Randi Zuckerberg, a former Facebook executive and sister to Meta Platforms CEO Mark Zuckerberg, serve on The Motley Fool’s board of directors. Jeremy Bowman holds positions in Meta Platforms and Netflix. The Motley Fool also has positions and recommends Alphabet, Meta Platforms, and Netflix. A disclosure policy by The Motley Fool is available.
The views expressed here are solely those of the author and do not necessarily represent the opinions of Nasdaq, Inc.
