Netflix’s shares grow by almost 14% in premarket trading due to robust subscriber

Netflix’s shares grow by almost 14% in premarket trading due to robust subscriber

Netflix’s shares experienced a significant increase in premarket trading on Thursday following the streaming platform’s third-quarter results, which surpassed Wall Street estimates.

The company announced an impressive net subscriber growth of 8.8 million, surpassing expectations and representing the largest quarterly growth since the second quarter of 2020. Additionally, the firm expressed its anticipation of achieving an operating margin of 20% for the full year 2023, which aligns with the upper end of the company’s previous guidance.

In the quarter, Netflix introduced measures to combat password sharing, restricting the use of an account to a single household. The tech company also introduced a new subscription option that enables users to reduce costs by watching advertisements before and during films and shows.

The results, which were released after hours on Wednesday, pleasantly surprised analysts with a forecast for comparable subscriber growth in the next quarter, ranging from plus to minus “a few million.”

The third-quarter revenue reached $8.542 billion, indicating a 7.8% year-on-year increase. Net income also saw a rise from $1.398 billion in the previous year to $1.677 billion.

While Netflix shares have appreciated by nearly 30% over the past year, they have slightly tempered their growth compared to 2021 levels due to concerns about competition in the streaming space, with an increasing number of rivals entering the market.

Netflix’s Earnings: Netflix’s substantial increase in subscriber additions was a notable highlight of its strong third quarter. Key factors, including margins, cash flow, and underlying trends, have further reinforced the company’s robust business performance. The outlook for a similarly robust fourth quarter, combined with several reasons for optimism, underpins our decision to raise our fair value estimate for Netflix stock to $350 from $330.

However, we believe that the 12% surge in response to the earnings report may have been slightly overenthusiastic. We anticipate that subscriber growth will moderate, and the eventual end of the actors’ strike is likely to result in a significant increase in cash content spending in 2024.

The third quarter saw a year-over-year total revenue increase of 8%, primarily driven by strong subscriber growth, which included 8.8 million net additions – the best result since the second quarter of 2020, during the pandemic-related lockdowns. Average revenue per member (ARM) remained flat or declined in each of Netflix’s four regions, with the exception of Latin America. Management attributed this to the introduction of the lower-cost ad tier, the absence of significant price increases over the past 18 months, and a shift in the plan mix.

Netflix Ad Revenue: We anticipate an increase in Average Revenue per Member (ARM) in the coming years due to Netflix’s announcement of price hikes in major markets, including the basic and premium plans in the U.S. Additionally, we expect advertising revenue to become a more significant contributor to the company’s top line. During the quarter, Netflix reported that 30% of new sign-ups in countries with the ad tier option opted for it. However, Netflix is still in the process of expanding its advertising infrastructure, including targeting and measurement capabilities, which should eventually lead to higher ad revenue per ad-tier subscriber.

Netflix's shares grow

The company’s operating margin has been steadily increasing, reaching 22% in this quarter, with an expected range of 22%-23% by 2024. We believe that the revenue drivers will provide operating leverage, although building out advertising capabilities and resolving industry strikes, such as the writers’ and actors’ strikes, will likely result in higher costs.

While we anticipate a significant slowdown in subscriber growth, we acknowledge that tailwinds may persist into the next year. The crackdown on password sharing and the introduction of the low-cost ad tier have created opportunities for price-sensitive subscribers who were already using Netflix without paying. Once paid sharing options are introduced to all accounts over the next year or so, we expect the tailwind for new subscribers to diminish. In the meantime, Netflix’s subscriber growth has been strong across various geographies, and the company anticipates a similarly robust fourth quarter in terms of new subscriber additions.