What do you think of Netflix's financial report that has risen more than 30x in ten years?

Among the many US stock markets, Netflix is boasting excellent performance, with its stock price soaring by an astonishing 30 times over the past 10 years.

As a pioneer in the streaming media industry, Netflix has benefited from the industry's explosive growth. Recently, the company has moved into a period of steady growth. So how do you decipher Netflix earnings reports? The three areas are critical: revenue growth, balance between content investment and cash flow, and profit margins.

Netflix used to achieve revenue growth of more than 20% compared to the previous year, but that era has passed. In the fourth quarter of 2022, the company's profit growth rate was around 2%, and it seemed to fall into negative growth. However, in the following quarter, Netflix's revenue growth increased, reaching around 7.8% in the third quarter of 2023. Going forward, whether Netflix can sustain this recovery in revenue growth is critical. Of particular note are the following two main indicators.

First, the most notable metric is the number of paid subscription contracts. Netflix's business model mainly relies on bringing in users by providing high-quality video content. The majority of the company's revenue comes from monthly subscription fees. Additionally, we have recently introduced a low-cost advertising support plan, and advertising revenue has been added while being low.

Therefore, the number of paid subscriptions is the foundation for Netflix's performance. An increase in subscription agreements will lead to future revenue growth. If you look at the trend, you can see that Netflix's paid subscription agreements are expanding. In the third quarter of 2023, there was an increase of approximately 9 million subscriptions compared to the previous quarter, the highest number of approximately 2.47 million people in the past 8 quarters.

One reason for this increase may be Netflix's countermeasure against the fact that multiple people shared a single account and were able to watch. As a result, some users who previously shared accounts were forced to buy their own accounts. In addition, the introduction of low-cost advertising support plans in emerging markets has also encouraged an increase in subscription agreements.

Next, the most important number is ARPU (average revenue per user). Higher ARPU translates to higher earnings on average. Over the past 2 years, Netflix's ARPU has mostly fluctuated between $11.50 and $12, with very little change. By region, ARPU in North America and Latin America is on an upward trend, while in Europe, where it used to decline, it has turned upward, showing strong movements over the past 4 quarters. ARPU in the APAC (Asia Pacific) region has declined due to the impact of low-cost ad support plans.

In a letter addressed to shareholders in the 3rd quarter of 2023, Netflix management said they are planning price increases in key markets such as the US, UK, and France, and they expect an increase in average revenue per user (ARPU) in these regions as a result. However, higher prices may lead to lower demand. There is a risk that consumers will decide they aren't worth the new price and cancel their subscriptions. This could surface as “customer churn” and have a negative impact on overall subscriber numbers.

Looking ahead, the key question for Netflix is whether it can continue to acquire new subscribers at a good pace. If subscribers can be retained and increased even after price increases, this indicates that the company's market power and customer support will continue. However, if there is a sharp decline or deceleration in subscriber numbers as a result of higher average revenue per user (ARPU), there is a possibility that a tough path lies ahead for Netflix's revenue growth.

Netflix's success in acquiring paid members is mainly due to its significant investment in content. Blockbuster series such as the drama “House of Cards: Stairway to Ambition” are essential to the company's growth and have contributed to the acquisition of hundreds of millions of paying customers.

However, excessive spending on content could put a strain on Netflix's cash flow and profit margins. Conversely, reducing spending can lead to a lack of fresh and engaging content to attract subscribers, which can also have a negative impact on revenue and profits. Therefore, Netflix must balance content investment with user satisfaction while aiming to maximize subscriber satisfaction, revenue, and profit growth with minimal content spend and operating expenses.

To evaluate Netflix's investment in content, look at two metrics: cash spent on content and number of content views. Cash spending on Netflix content has been modest in recent quarters, and has declined for 5 consecutive quarters compared to the previous year, including a decrease of close to 30% in the 3rd quarter of 2023.

When it comes to content assets, old content tends to become less valuable over time. Therefore, it is necessary to amortize the value in accordance with accounting policies. Since the growth rate of Netflix's content assets has not kept up with the depreciation rate, the value of its content assets has been declining over the past four quarters.

This conservative content investment strategy may be one reason why Netflix's revenue growth rate during the same period went into single digits.

One positive aspect of this strategy is the fact that Netflix's free cash flow has improved drastically and has consistently gone from negative to above net profit levels over the past 4 quarters. As cash reserves have increased, Netflix, which has not been frequently buying back shares until now, has begun to consistently repurchase shares over the past 3 quarters. There is a possibility that this will support stock prices.

In summary, Netflix's content investments are cyclical in nature. Over the long term, if Netflix can maintain revenue and cash flow growth that exceeds content investments, this may be assessed as a healthy financial position. Conversely, if Netflix's content investment consistently exceeds revenue and cash flow growth, there is a risk of financial risk in the near future.

Companies that attract subscribers by investing large amounts of content, such as Netflix, usually tend to operate on a considerable scale. You can get more subscribers and higher returns from the same level of content investment, which can lead to increased profit margins. However, if content costs rise while revenue growth slows, profit margins are likely to fall under significant pressure.

Thus, Netflix's profitability is closely linked to the balance between content spending and revenue growth.

Netflix's profit margins are seasonal, so it's important to analyze changes from year to year. Since Q4 2021, while Netflix's revenue growth has consistently fallen below 20%, the company has gained the ability to increase profits as content spending remained at a high level. As a result, both return on sales and net profit margins showed a downward trend for 6 consecutive quarters.

Recently, however, things have changed. Sales growth showed signs of recovery, and content investment was drastically reduced for the fourth consecutive quarter. As a result, Netflix's profitability has begun to show signs of recovery, and both profit margins on sales and net profit margins have recovered compared to the previous year. Going forward, it will be important to keep an eye on whether this positive trend in Netflix's profit margins continues.

Summarizing the above, it is as follows.

- As for sales growth, it's important to keep a close eye on Netflix subscriber numbers and ARPU developments. The company's challenge depends on whether it is possible to balance an increase in subscribers and an increase in ARPU.

- If you look at content asset investments and cash flow, you can see that Netflix has recently reduced content creation spending and improved cash flow. But investing in content, growing sales, and maintaining long-term balance in cash flow is critical.

- In recent quarters, Netflix saw an improvement in profit margins, as both sales growth and content spending were impacted. We need to continue to keep a close eye on the sustainability of this improvement in profitability.