ii view: profit taking at Netflix despite jump in subscribers

Cracking down on password sharing, offering a lower priced ad-included service and eyeing the world of video games. Buy, sell, or hold? 

Second-quarter results to 30 June

• Added 5.89 million net new subscribers to a total of 238.4 million
• Revenue up 2.7% year-over-year to $8.19 billion
• Earnings per share (EPS) up 6% to $3.29

Guidance:

• Expects revenues of $8.52 in the current third quarter
• Expects EPS of $3.52 in the current third quarter

• Invest with ii: Top US Stocks | US Earnings Season | Interactive investor Offers

ii round-up:

Streaming giant Netflix Inc (NASDAQ:NFLX) detailed strong growth in new subscribers as it continued the rollout of its password sharing crackdown, but forecast next quarter revenues shy of Wall Street forecasts. 

Second-quarter new subscribers jumped 5.89 million from the prior quarter’s 1.75 million and came following the launch of its new initiative in its home US market. That pushed earnings up 6% year-over-year to $3.29 per share. Revenue for the current third quarter to the end of September are forecast by management to come in at $8.52 billion, up from last year’s $7.93 billion but short of the $8.7 billion analysts had hoped for.

Shares in the Nasdaq 100 company fell by more than 5% in afterhours US trading, although they had been trading at their highest since January 2022. Netflix shares came into this latest news up by 62% year-to-date. That’s similar to Amazon (NASDAQ:AMZN), owner of streaming service Prime, although way ahead of a less than 1% gain for The Walt Disney Co (NYSE:DIS) shares and its Disney Plus service. The Nasdaq 100 index itself is up by almost 45%. 

Netflix has for some time now been trying to re-accelerate revenue growth, underpinned by initiatives, including a crackdown on password sharing and introducing a lower cost service, but with the addition of corporate paid-for advertising. 

Forecast year-over-year revenue growth of 7% for the current ongoing third quarter is up from currency adjusted 6% growth in Q2, with broker Morgan Stanley forecasting double digit growth come the fourth and final quarter. 

Gross debt of $14.5 billion at the end of the second quarter remains within management’s target range of up to $15 billion, with share buybacks of $645 million during the period, leaving a further $3.4 billion under it current $5 billion plan.

ii view:

Started in 1997, Netflix today has a stock market value of around $210 billion, above both Sky owner Comcast Corp Class A (NASDAQ:CMCSA) at $178 billion and Walt Disney at $159 billion. A producer of content, its popular programmes have included Squid Game, Breaking Bad, Bridgerton and The Witcher. It operates across four key regions: UCAN (the United States and Canada), EMEA (Europe, Middle East, and Africa), LATAM (Latin America), and APAC (Asia Pacific). 

For investors, higher mortgage and rental costs could see many households looking for savings, with cuts to non-essential entertainment services such as Netflix a possible candidate. Strikes in Hollywood may hinder production. Competition from rivals remains intense, while unlike rivals such as Apple Inc (NASDAQ:AAPL), Comcast and ITV (LSE:ITV), Netflix does not pay a dividend. 

• Barbie and Ken movie hype is just the beginning for Mattel
• Why Terry Smith sold Amazon, and how his portfolio is performing
• AI stars Nvidia and Palantir: buy, hold, or sell?

On the upside, management initiatives regarding password sharing do appear to be seeing current borrowers convert to paying members. The lower-cost advertising plan does ease the cost for subscribers, making it more viable during a cost-of-living crisis, while Netflix has also been testing an online game offer in selected countries following the previous purchase of a video games maker.

On balance, and while a dose of caution looks highly sensible, the broad trend from linear TV to streaming should continue to benefit this now established giant of the media world. 

Positives: 

• Streaming TV services overall still growing
• Potential to add sport content

Negatives:

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

The average rating of stock market analysts:

Cautious buy