After the U.S. stock market on Thursday, April 18, streaming giant Netflix announced an overall positive financial report for the first quarter of 2024. Its paying subscribers increased by 9.33 million, nearly double market expectations, but rose 3% after hours, and then fell sharply by 7%.
According to some analysts, this is due to the company's warning that "typical seasonal factors will make the user increment in the second quarter lower than in the first quarter", that is, suggesting that the positive momentum of user growth will slow down, triggering an after-hours stock price decline.
The company's record number of new users in the fourth quarter of last year has raised expectations for its continued positive momentum in 2024. Among the analysts covering Netflix, 26 have a "buy" rating, 13 have a "hold" rating, and only one recommends a "sell".
However, Wall Street's average price target for the stock over the next 12 months is $598.98, which is about 2% lower than the current share price. Netflix has hit a new 52-week high for six consecutive months, but it is still 11% short of its all-time high at the end of 2021.
Netflix's Q1 revenue growth of 15% is the best in at least two years, the profit margin is the highest in at least three years, and the number of new users has doubled compared to expectations
Netflix's first-quarter report was generally better than expected. Revenue for the quarter was $9.37 billion, or up 15% year-on-year, EPS was $5.28 per share, up 83% year-over-year, net profit was up 79% to $2.33 billion, operating profit was up 54% to $2.6 billion, and operating margin was up 7 percentage points year-over-year to 28%, all of which far exceeded market expectations and the company's official guidance.
Previously, according to data provider LSEG, analysts expected Netflix to earn $9.27 billion in the first quarter of this year, an increase of 13.6% from $8.16 billion in the same period last year, and EPS per share may be $4.52, a sharp jump of about 57% from $2.88 in the same period last year.
These market expectations are slightly higher than Netflix's first-quarter revenue guidance of $9.24 billion, which represents a 13.2% year-over-year increase and would be the largest revenue increase in more than two years. Netflix also expects an operating margin of 26.2% for the quarter, the best in three years since the first quarter of 2021. The company expects net income to increase 51% year-over-year to $1.98 billion, and EPS to increase nearly 56% year-over-year to $4.49.
Starting in the first quarter of last year, Netflix no longer provided guidance for subscriber growth in the next quarter, and instead used revenue growth as the main indicator for the company's overall growth evaluation. But Wall Street expects users to increase by 4.88 million in the first quarter of this year, nearly three times the 1.75 million in the same period last year.
The actual quarterly report showed that Netflix added a net 9.33 million paid streaming subscribers in the quarter, bringing the global paid membership to 269.6 million, a year-on-year increase of 16% to a record high, and exceeding analysts' expectations of 264.5 million.
Among them, the number of paying users in North America, the largest market, increased by 2.53 million, far exceeding the market expectation of an increase of 988,600. The number of users in the Asia-Pacific region increased by 2.16 million, compared to analysts' expectations of an increase of 1.48 million.
According to the financial statement, nearly 270 million households in more than 190 countries around the world have subscribed to Netflix, and its audience has exceeded 500 million based on the average population of more than two people per household, ranking first in the entertainment company industry.
The company also said that the number of members who subscribed to packages with ads in the first quarter increased by 65% quarter-on-quarter compared with the fourth quarter of last year, maintaining the trend of nearly 70% sequential growth in the third and fourth quarters of last year.
Netflix expects revenue to increase by another 16% in the second quarter, and will no longer report key indicators such as the number of quarterly members in the first quarter of next year
In terms of financial guidance, Netflix expects fiscal 2024 revenue growth of 13% to 15%, which is a healthy double-digit growth rate, and raised its full-year operating margin forecast to 25% based on foreign exchange rates as of January 24, higher than the consensus of 24%.
Netflix also maintained its full-year free cash flow guidance unchanged at about $6 billion, slightly below analysts' expectations of $6.49 billion, and also maintained its forecast for cash content expenditures of up to $17 billion in 2024.
The company expects second-quarter EPS earnings of $4.68 per share, beating analysts' expectations of $4.54, and expects second-quarter revenue of $9.49 billion to $9.51 billion, up 16% year-over-year.
In addition, Netflix generated net cash from operating activities of $2.2 billion and free cash flow totaled $2.1 billion in the first quarter, both unchanged from the same period last year. During the reporting period, the Company repaid $400 million of senior notes with cash on hand and repurchased 3.6 million shares for $2.0 billion. Total debt at the end of the quarter was $14 billion, with cash and cash equivalents of $7 billion. The company also expanded its revolving credit facility from $1 billion to $3 billion.
Netflix said that its reporting rules for paid membership will be changed again, and from the first quarter of 2025, it will stop reporting the number of quarterly members and average revenue per member (ARM), and add an annual revenue guidance sub-item. However, key milestones are announced when subscribers are reached:
"We use revenue and operating profit as the primary financial metrics, and engagement (i.e., the amount of time users spend) as the best measure of customer satisfaction.
In the early days of the company, when there was little revenue or profit, membership growth was a strong indicator of our future potential. But now we're generating very good profits and free cash flow and developing new revenue streams such as advertising and additional affiliate features, so the number of affiliates is just one of the components of the company's growth metrics. ”
Why does it matter? It could affect tech stocks and the broader market during earnings season
Netflix is the first major U.S. technology company to publish a quarterly report, and its results and subsequent share price performance are crucial not only to revealing and leading the trend of technology stocks, but also to the trajectory of the entire market. Some analysts say that if the stock suffers a heavy blow, it may mean that the stock market as a whole is overvalued and triggers profit-taking.
The deterioration in market sentiment was accelerating as Netflix reported its earnings report, with the Nasdaq retreating 4.6% from its all-time high in a week, largely due to a surge in Treasury yields on higher-than-expected U.S. inflation data for March, which hit growth tech stocks hard.
The Motley Fool pointed out that historically, investors have tended to penalize companies for positive earnings results when market sentiment deteriorates, adding uncertainty to the post-earnings stock price outlook of big tech companies.
What to focus on?User growth, advertising, price increases, and live sports
Competition in the streaming space is fierce, with traditional giants like Disney and Paramount Universal, as well as up-and-comers like Amazon and Apple, vying for market share. As the world's largest streaming media platform, stable subscriber growth remains a key metric for Netflix's earnings report.
Investors will also be watching to see if the new advertising business launched in November 2022 is starting to improve the company's financial performance, and how the crackdown on password sharing for paid accounts in key markets around the world will affect the number of users.
With these two measures, Netflix's subscriber growth has recovered significantly in 2023, following a significant slowdown in 2022. The number of members with ad packages has increased by about 70% quarter-over-quarter for several consecutive quarters, although the company has not released specific figures, and it recently said that more than 23 million monthly active users worldwide use ad-included packages.
The market is also waiting for the news of the price increase of Netflix packages. On the conference call of last year's quarterly report, co-CEO Greg Peters hinted that last year due to the crackdown on the sharing of paid account passwords, the package price increase was basically suspended, but "now that we have completed this task, we can return to the previous standard price increase method, and the price increase in the United States, the United Kingdom and France has been better than the company expected." ”
The live entertainment sector may be a bright spot for future growth. Earlier this year, Netflix announced that it had acquired the exclusive media rights to WWE's flagship weekly show "Raw" for ten years from 2025, marking its first foray into live sports at a cost of about $500 million a year. Netflix also hosted a live tennis match in March and invited Tyson to a live boxing match in July.
What do you think of Wall Street?
Wall Street is widely betting on Netflix to maintain its upward momentum in 2024. Before the release of the Q1 earnings report, mainstream investment banks such as Morgan Stanley, JPMorgan Chase, Barclays, UBS, Wedbush, Guggenheim, Macquarie, and TD Cowen all raised their target prices.
This was mainly due to the company's 13.1 million new subscribers in the fourth quarter of last year, indicating that the strategy to combat password sharing is driving more people to convert into paid members.
Macquarie said Netflix "remains the undisputed leader in streaming TV" and that the crackdown on password sharing and lower-priced ad-inclusive packages "has successfully re-accelerated the growth of average revenue for both subscribers and corporate members." Netflix previously estimated that about 100 million users worldwide share passwords, which could bring more room for subscriber growth in 2024:
"Investors should pay attention to Netflix's average revenue per membership, as the monetization power of its ad-supported packages and subscriber prices are likely to rise. Netflix's mid-range ad-free plan in the US averages $15.49 per month, which is lower than competitors like Hulu. And its ad-inclusive user base is growing, giving it greater potential for scale and pricing power in a generally improving advertising market.
Netflix hasn't raised the price of its standard plan (i.e., the mid-range ad-free plan mentioned above) since January 2022, and we believe Netflix's pricing power advantage over its competitors will make price increases imminent. ”
UBS Securities also expects Netflix to continue to capture a larger share of overall TV viewing and lower average prices per hour spent than its competitors. This "strong pricing power" will allow it to increase subscription prices this year, accelerating revenue and earnings growth. Combined with the incremental revenue brought by advertising and healthy user growth, Netflix's total revenue in 2024 may increase by 15%, doubling the growth rate of 7% last year.
According to UBS, Netflix "is a major beneficiary of structural changes in the media industry" as the goal of overall streaming shifts from subscriber growth to profitability that traditional media companies focus on. New strategies to increase profitability include subscription package price increases, platform consolidation, library management and consequent asset write-downs, content spend cuts, and a renewed emphasis on content licensing and licensing:
"We raised Netflix's 2024 net new subscriber guidance from 18 million to 20 million to reflect continued subscriber growth, an upward trend in average revenue per membership, and higher operating leverage.
Netflix has seen 29.5 million net new subscribers in 2023, up from an annual average of 21 million from 2020 to 2022, thanks to a successful global crackdown on password-sharing for paid accounts.
While we expect net subscriber growth to slow down, we believe Netflix still has significant room to grow as it continues to convert users into paid memberships and attract new users, and therefore raised its free cash flow forecast to 2027. ”
Morgan Stanley believes that Netflix launched more "breakthrough original hit series" in the first quarter of this year than in the fourth quarter of last year, which will lead to higher-than-expected user growth and drive earnings higher:
"The market may have underestimated the benefits that Netflix has received from non-English content, the depth of viewing of thousands of titles, and the impact of Netflix's original repertoire and exclusive access rights on its platform.
These strengths give Netflix a structurally objective competitive advantage, and its entry into new businesses such as advertising, gaming and live sports reinforces our optimism about the long-term growth and return on capital of its business. ”
In addition, TD Cowen is bullish on the dual impetus behind Netflix, namely the financial gains from cracking down on password sharing on paid accounts, and the "strong latent commercial demand from a strong and increasingly global content sector". Wedbush Securities also believes that advertising, gaming, and more licensed IPs allow Netflix to "manage content costs and maintain a leading position in content consumption among its streaming peers."
However, investment manager Moffett Nathanson cautioned that the crackdown on password sharing may have upfront Netflix's user growth, as it would not change the basic fact that fewer households in North America, the largest market, have not yet subscribed to Netflix. Broker Piper Sandler, which also maintains a "neutral" rating, is also concerned that the market's expectations for Netflix's user growth may be too high.
Other analysts say Netflix's investment in gaming, live streaming and sports-related content may bring a good revenue increment, but it will be a blow to profits. Netflix is aggressively promoting cheaper packages with ads, which, combined with higher digital marketing expenses, could squeeze profits.
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