Netflix's Stock Surges Following Impressive Earnings Report
Netflix's earnings have been under scrutiny, particularly because it is the first tech company to report and its stock has underperformed recently after a significant year-to-date run. Goldman Sachs, for instance, anticipated around 6 million new subscribers in the quarter, an increase to the full-year free cash flow guide of around 6 billion, and a fourth-quarter revenue guide that aligns with the street. Goldman rated Netflix 8.5 on a 1-10 positioning scale, indicating a high risk of disappointment. However, expectations were high for a solid beat in the quarter.
Netflix's Earnings Report Highlights
Netflix surpassed expectations, reporting the following:
- Revenue of $9.82 billion, a 15% year-over-year increase, beating estimates of $9.78 billion
- Earnings per share (EPS) of $5.40 versus $3.73 year-over-year, surpassing estimates of $5.12. This includes a $91 million loss from foreign exchange related to the company's Euro denominated debt remeasurement.
- Operating margin of 29.6% versus 22.4% year-over-year, exceeding estimates of 27.8%. The operating margin of 30% improved seven percentage points versus the year-ago quarter.
- Operating income of $2.91 billion, a 52% year-over-year increase, surpassing estimates of $2.72 billion
- Free cash flow of $2.19 billion, a 16% year-over-year increase, beating estimates of $1.73 billion
Despite the constraints of last year's Hollywood strikes on its new programming slate, Netflix exceeded Wall Street's expectations on every major financial metric.
Subscriber Growth and Regional Performance
While Netflix performed exceptionally well on the top and bottom lines, there were some hiccups at the subscriber level. Netflix added more subscribers than expected, with 5.07 million new subscribers against an estimate of 4.5 million. However, this was primarily due to growth in EMEA and Asia-Pacific regions. Subscriptions in the US and Canada fell slightly short of expectations, while Latin American subscriptions actually declined, contrary to expectations of nearly a 1 million increase.
Here are the detailed subscriber stats:
- Streaming paid net change: +5.07 million, down 42% year-over-year, but beating estimates of +4.52 million
- UCAN streaming paid net change: +690,000, down 61% year-over-year, missing estimates of +696,658
- EMEA streaming paid net change: +2.17 million, down 45% year-over-year, beating estimates of +1.44 million
- LATAM streaming paid net change: -70,000 versus +1.18 million year-over-year, missing estimate of +975,270
- APAC streaming paid net change: +2.28 million, up 21% year-over-year, beating estimate of +1.56 million
- Streaming paid memberships: 282.72 million, up 14% year-over-year, beating estimate of 281.92 million
Regional Performance Details
In the UCAN region, where subscriber growth missed expectations, revenue increased by 16% year over year, driven by 10% and 5% growth in average paid memberships and average revenue per user (ARM), respectively.
Revenue in EMEA grew 16% year over year, consistent with the increase in average paid memberships.
In APAC, Netflix had a strong local content slate in Japan, Korea, Thailand, and India in Q3, leading to a 19% year-over-year revenue growth rate, the highest among all regions.
LATAM revenue rose 9% year over year, with a surprising decline of 0.1 million in net subscribers due to recent price changes and a softer content slate. However, Netflix noted that "membership growth has rebounded nicely early in Q4’24."
Q3’24 operating income increased 52% year over year to $2.9 billion, while the operating margin of 30% improved seven percentage points compared to the year-ago quarter. This was above the guidance forecast due to slightly higher revenue and the timing of spending.
Looking Forward to Q4 and Beyond
For Q4, Netflix expects to generate $10.13 billion in revenue, which would translate into $2.190 billion operating income, or a 21.6% profit margin, and expects $4.23 in EPS. While Netflix no longer provides subscriber guidance, it sees Q4 paid net additions higher than Q3 due to normal seasonality and a strong content slate.
For 2025, Netflix forecasts revenue of $43B-$44B, representing growth of 11%-13% off the company's 2024 revenue guidance of $38.9B. Netflix expects "revenue growth to be driven by a healthy increase in paid memberships and ARM. We’re targeting a 2025 operating margin of 28% (also based on F/X rates as of 9/30) vs. our forecast for 27% in 2024."
Netflix's Advertising Business and Live Programming Investment
Netflix's recently launched advertising business is progressing slowly, but the company has grand ambitions for the next few years. The company is building its own advertising technology and has struck several deals to sell its advertising-supported service alongside other streaming services.
Netflix has also started to invest in live programming as a way to increase the amount of inventory it has to sell to advertisers. It will offer a live boxing match next month, followed by two National Football League games on Christmas Day. Starting next year, Netflix will offer customers three hours of live wrestling every week.
Despite two Hollywood labor stoppages last year delaying Netflix’s slate of programming for much of this year, the company still scored big hits with The Perfect Couple, a new season of Emily in Paris, and a series on the infamous murderers, the Menendez brothers, from producer Ryan Murphy, as well as the movies Rebel Ridge and The Union. The company said it has a particularly strong slate in the fourth quarter, including the return of Squid Game, its most-watched series ever.
Netflix's Stock Performance and Future Growth
Shares of Netflix have more than quadrupled since May 2022, when a slowdown in the company’s growth led to a major sell-off and spooked investors about the entertainment business. Since then, the company has added more than 60 million customers thanks to a crackdown on password sharing and the introduction of a lower-priced subscription with advertising.
However, most analysts believe the boost from the password crackdown is temporary, and that Netflix will soon need to find another way to grow. The company has yet to see material financial returns from its investment in advertising or video games, and some on Wall Street now worry the stock is overvalued.
The market reaction was initially disappointed, pushing the stock briefly lower, before eventually rebounding strongly and rising as much as 4% after hours, not too far from its all-time high hit one week ago at $736.
Bottom Line
Netflix's impressive earnings report and its ambitious plans for the future have certainly caught the attention of investors and market watchers. While there are concerns about the sustainability of its growth and the value of its stock, the company's performance and strategies suggest it is well-positioned to navigate future challenges. What are your thoughts on Netflix's performance and future prospects? Share this article with your friends and let us know your views. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6 pm.
Netflix's Stock Surges Following Impressive Earnings Report
Netflix's earnings have been under scrutiny, particularly because it is the first tech company to report and its stock has underperformed recently after a significant year-to-date run. Goldman Sachs, for instance, anticipated around 6 million new subscribers in the quarter, an increase to the full-year free cash flow guide of around 6 billion, and a fourth-quarter revenue guide that aligns with the street. Goldman rated Netflix 8.5 on a 1-10 positioning scale, indicating a high risk of disappointment. However, expectations were high for a solid beat in the quarter.
Netflix's Earnings Report Highlights
Netflix surpassed expectations, reporting the following:
- Revenue of $9.82 billion, a 15% year-over-year increase, beating estimates of $9.78 billion
- Earnings per share (EPS) of $5.40 versus $3.73 year-over-year, surpassing estimates of $5.12. This includes a $91 million loss from foreign exchange related to the company's Euro denominated debt remeasurement.
- Operating margin of 29.6% versus 22.4% year-over-year, exceeding estimates of 27.8%. The operating margin of 30% improved seven percentage points versus the year-ago quarter.
- Operating income of $2.91 billion, a 52% year-over-year increase, surpassing estimates of $2.72 billion
- Free cash flow of $2.19 billion, a 16% year-over-year increase, beating estimates of $1.73 billion
Despite the constraints of last year's Hollywood strikes on its new programming slate, Netflix exceeded Wall Street's expectations on every major financial metric.
Subscriber Growth and Regional Performance
While Netflix performed exceptionally well on the top and bottom lines, there were some hiccups at the subscriber level. Netflix added more subscribers than expected, with 5.07 million new subscribers against an estimate of 4.5 million. However, this was primarily due to growth in EMEA and Asia-Pacific regions. Subscriptions in the US and Canada fell slightly short of expectations, while Latin American subscriptions actually declined, contrary to expectations of nearly a 1 million increase.
Here are the detailed subscriber stats:
- Streaming paid net change: +5.07 million, down 42% year-over-year, but beating estimates of +4.52 million
- UCAN streaming paid net change: +690,000, down 61% year-over-year, missing estimates of +696,658
- EMEA streaming paid net change: +2.17 million, down 45% year-over-year, beating estimates of +1.44 million
- LATAM streaming paid net change: -70,000 versus +1.18 million year-over-year, missing estimate of +975,270
- APAC streaming paid net change: +2.28 million, up 21% year-over-year, beating estimate of +1.56 million
- Streaming paid memberships: 282.72 million, up 14% year-over-year, beating estimate of 281.92 million
Regional Performance Details
In the UCAN region, where subscriber growth missed expectations, revenue increased by 16% year over year, driven by 10% and 5% growth in average paid memberships and average revenue per user (ARM), respectively.
Revenue in EMEA grew 16% year over year, consistent with the increase in average paid memberships.
In APAC, Netflix had a strong local content slate in Japan, Korea, Thailand, and India in Q3, leading to a 19% year-over-year revenue growth rate, the highest among all regions.
LATAM revenue rose 9% year over year, with a surprising decline of 0.1 million in net subscribers due to recent price changes and a softer content slate. However, Netflix noted that "membership growth has rebounded nicely early in Q4’24."
Q3’24 operating income increased 52% year over year to $2.9 billion, while the operating margin of 30% improved seven percentage points compared to the year-ago quarter. This was above the guidance forecast due to slightly higher revenue and the timing of spending.
Looking Forward to Q4 and Beyond
For Q4, Netflix expects to generate $10.13 billion in revenue, which would translate into $2.190 billion operating income, or a 21.6% profit margin, and expects $4.23 in EPS. While Netflix no longer provides subscriber guidance, it sees Q4 paid net additions higher than Q3 due to normal seasonality and a strong content slate.
For 2025, Netflix forecasts revenue of $43B-$44B, representing growth of 11%-13% off the company's 2024 revenue guidance of $38.9B. Netflix expects "revenue growth to be driven by a healthy increase in paid memberships and ARM. We’re targeting a 2025 operating margin of 28% (also based on F/X rates as of 9/30) vs. our forecast for 27% in 2024."
Netflix's Advertising Business and Live Programming Investment
Netflix's recently launched advertising business is progressing slowly, but the company has grand ambitions for the next few years. The company is building its own advertising technology and has struck several deals to sell its advertising-supported service alongside other streaming services.
Netflix has also started to invest in live programming as a way to increase the amount of inventory it has to sell to advertisers. It will offer a live boxing match next month, followed by two National Football League games on Christmas Day. Starting next year, Netflix will offer customers three hours of live wrestling every week.
Despite two Hollywood labor stoppages last year delaying Netflix’s slate of programming for much of this year, the company still scored big hits with The Perfect Couple, a new season of Emily in Paris, and a series on the infamous murderers, the Menendez brothers, from producer Ryan Murphy, as well as the movies Rebel Ridge and The Union. The company said it has a particularly strong slate in the fourth quarter, including the return of Squid Game, its most-watched series ever.
Netflix's Stock Performance and Future Growth
Shares of Netflix have more than quadrupled since May 2022, when a slowdown in the company’s growth led to a major sell-off and spooked investors about the entertainment business. Since then, the company has added more than 60 million customers thanks to a crackdown on password sharing and the introduction of a lower-priced subscription with advertising.
However, most analysts believe the boost from the password crackdown is temporary, and that Netflix will soon need to find another way to grow. The company has yet to see material financial returns from its investment in advertising or video games, and some on Wall Street now worry the stock is overvalued.
The market reaction was initially disappointed, pushing the stock briefly lower, before eventually rebounding strongly and rising as much as 4% after hours, not too far from its all-time high hit one week ago at $736.
Bottom Line
Netflix's impressive earnings report and its ambitious plans for the future have certainly caught the attention of investors and market watchers. While there are concerns about the sustainability of its growth and the value of its stock, the company's performance and strategies suggest it is well-positioned to navigate future challenges. What are your thoughts on Netflix's performance and future prospects? Share this article with your friends and let us know your views. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6 pm.
