Although the net increase in Netflix users in the second quarter of 8.05 million exceeded expectations, it has shown a gradual downward trend for several consecutive quarters, and both the guidance for third-quarter revenue and the outlook for full-year free cash flow are below market expectations, causing a sharp drop in stock prices after hours. However, the overall bullish situation in the second quarter report, the company said that there is significant growth potential in the India market, and raised the lower limit of the range of full-year revenue growth rate, and Wall Street maintains high expectations.
After-market trading on Thursday, July 18, the streaming media giant, Netflix, announced bullish Q2 earnings for 2024, but its stock price fell nearly 7% during after-hours trading due to lower-than-expected Q3 revenue guidance, slower quarter-over-quarter user growth, and a decline in free cash flow. $Netflix (NFLX.US)$As Netflix's stock price approached its historical high in November 2021, Wall Street had high expectations for this financial report. Netflix subsequently stated that there is still significant growth potential in the Indian market, and after an hour of the release of the financial report, the post-market stock price stopped falling and turned upward.
During Netflix's recent surge in stock price, the company announced that India's market still has a lot of room for growth, and following the release of its financial report, the post-market trading saw a turnaround in stock prices.
In the second quarter, Netflix's revenue and EPS exceeded expectations, with net user additions doubling market expectations, but showing a quarterly downward trend.
In the second quarter, Netflix's revenue increased nearly 17% year-on-year to $9.56 billion, higher than analysts' expectations of $9.53 billion and the company's official guidance of $9.49 billion, and up from $8.19 billion in Q2 2023.
EPS increased 48% year-on-year to $4.88, exceeding market expectations of $4.74 and Netflix's guidance of $4.68, up from $3.29 in the same period last year.
Operating profit increased 42% year-on-year to $2.6 billion, higher than market expectations of $2.43 billion, with an operating margin of 27.2%, higher than the same period last year's 22.3%, and slightly lower than 28% in the previous quarter, but in line with expectations.
Meanwhile, in the second quarter, Netflix's net user additions were nearly double market expectations, with the number of global paid users up 16.5% year-on-year to about 0.278 billion, compared to analysts' expectations of about 0.274 billion. The net increase in paid streaming media users for the quarter was 8.05 million, exceeding market expectations of 4.87 million.
Among them, net paid user additions in the largest market, the United States and Canada, were 1.45 million, up 24% year-on-year, exceeding market expectations of 1.19 million; net additions in the Asia-Pacific region were 2.83 million, up 164% year-on-year, exceeding market expectations of 1.25 million; net additions in the Europe, Middle East and Africa (EMEA) region were 2.24 million, down 7.8% year-on-year, but higher than the expected increase of 1.56 million; net additions in the Latin American market were 1.53 million, up 25% year-on-year.
Some analysts pointed out that North and Latin America accounted for the main increase in net paid user additions year-on-year, but growth slowed down month-over-month. Although the net increase in paid users for the entire year exceeded the 5.9 million increase in the same period last year, it also showed a quarterly downward trend. For example, in Q4 2023, user growth was 13.12 million, while in Q1 2024, it was 9.3 million, which is close to doubling the expected increase.
Netflix will stop reporting new subscription user data and ARPU (average revenue per user) indicators starting in 2025, which has raised concerns about the long-term trend of user growth. However, the company said that this was because future focus would shift from subscription user growth to focusing on revenue and operating profit margin as the main financial indicators, and customer satisfaction would be measured by user engagement (i.e. time spent on the platform).
Netflix has raised the lower end of its full-year revenue year-on-year growth rate range, but the outlook for Q3 revenue and full-year free cash flow is not optimistic.
In terms of performance outlook, Netflix expects full-year 2024 revenue to grow by 14% to 15% year-on-year, up from the previous forecast of 13% to 15%, and equal to the lower end of the revenue growth range being raised. The market still expects revenue to grow by about 15%.
Wall Street also expects the annual average revenue growth rate to remain at 13% over the next three years. Netflix's EPS this year is expected to grow 53% from $12.03 to $18.41 per share, and then increase 21% to $22.29 per share by 2025.
At the same time, Netflix expects a full-year operating profit margin of 26% this year, with analysts expecting it to remain unchanged at 25%. Netflix maintains its full-year free cash flow (FCF) forecast at about $6 billion, lower than analysts' forecast of $6.59 billion.
It is worth noting that although Netflix is expected to have an EPS of $5.10 per share in Q3, exceeding market expectations of $0.474 billion, Q3 revenue is expected to be $9.73 billion, significantly lower than analysts' expectations of $9.83 billion.
Financial blog Zerohedge reported that Netflix's free cash flow fell nearly 50% quarter-on-quarter to its lowest level since 2022. The company also reiterated that Q3 net additions of paid users will be lower than the same period last year, which was the first full quarter after the crackdown on shared accounts.
Netflix is actively expanding its ability to generate revenue through advertising, and currently offers a $6.99 per month ad package in 12 countries / regions around the world. The company stated that in the second quarter, the number of subscription package users with ads increased by 34% year-on-year, accounting for more than 45% of all users in the market. However, Netflix also admitted that the road to actually providing revenue contributions through advertising is still very long.
"We don't expect advertising to be the main driver of revenue growth in 2024 or 2025. The biggest challenge it faces in advertising is the need to provide more products to advertisers and to improve its technological capabilities."
What is the most concerning?
Morgan Stanley analyst Benjamin Swinburne said that despite many positive factors already reflected in Netflix's stock price, considering the still huge growth opportunities in the future, the stock is still bullish. On the one hand, investors appreciate Netflix's entry into sports event content and holding live events. In May of this year, the company announced that it had won the streaming broadcast rights for two NFL (National Football League) games on Christmas Day for the next three years.
On the one hand, investors appreciate Netflix's entry into sports event content and holding live events. In May of this year, the company announced that it had won the streaming broadcast rights for two NFL (National Football League) games on Christmas Day for the next three years.
Netflix's ad revenue earning potential continues to be popular. In May, Netflix revealed that its minimum-priced ad-included subscription package has won 40 million global monthly active users, a significant increase from 15 million users in November last year, an increase of 35 million from the same period last year.
According to sources, after being introduced into the service for the first time in 2022, the quarter-on-quarter growth rate of advertising revenue in the fourth quarter and the first quarter of last year and this year respectively was as high as 70%, 70% and 65%. Goldman Sachs estimates that advertising may generate nearly $3 billion in revenue for Netflix in 2024.
In May, Netflix also claimed that 40% of all newly registered streaming accounts chose the ad-included package of $6.99 per month, and plans to launch an internal advertising technology platform by the end of next year. However, Bank of America believes that advertising will not bring substantial revenue contributions until next year.
How does Wall Street look at this?
Many analysts have raised their target price for Netflix before the second quarter earnings release. Bank of America has raised its target price from $700 to $740, "reflecting the continuing development momentum of the underlying business," bullish on "world-class brands, leading global user groups and innovative leading positions," and expecting advertising revenue in 2025 and 2026 "will (without fear of fierce competition) increase significantly."
JPMorgan also bullish on Netflix's significant scale effect advantage in the streaming media field, stating that there are still huge opportunities in the future. For example, Netflix accounts for less than 10% of TV playback time in mature markets such as North America. The company's advantages in FCF generation and strong balance sheet form a sharp contrast with competitors who significantly reduce spending:
"Our analysis of Netflix's user engagement data continues to show that it is unique, particularly in terms of international content strength and consumption depth. Powerful core execution capabilities, crackdown on sharing of paid accounts and ad-included packages that help penetrate more price-sensitive groups are promoting its historical record of net new users in 2024."
TD Cowen raised its target price to $775 and raised its expectations for the growth of subscription users this year, stating that Netflix continues to benefit from cracking down on shared paid accounts. Its survey shows that 23% of respondents in the second quarter said that they most often use Netflix to load video content on TV, ranking first, followed by Google's YouTube, with a ratio of 15%. Basic cable TV ranks third at 12%.
KeyBanc raised its target price to $735 and maintained a "buy" rating, believing that "streaming media competitors' recent price increases and Netflix's persistent low customer turnover rate will support the company to raise prices again in the next few quarters."
JPMorgan raised its target price to $75 billion, stating that Netflix's huge scale, strong user engagement and diversified content will make it the default choice for users to consume TV, movies and other long-form content, and will make greater progress in live sports events.
Although Wedbush Securities did not modify its target price, it upgraded its rating to "buy," believing that the biggest advantage of the advertising package is to limit user churn, and Netflix continues to enhance its position as a winner of the "streaming media war":
"Netflix has found the right model through global content creation, balancing costs and improving profitability. We believe that the company will continue to expand its profitability and generate more and more FCF.
Netflix has successfully established an almost insurmountable lead in the streaming media war. We expect that competitors will continue to struggle when trying to replicate Netflix's business model.
What will be the focus in the future?
However, Citibank maintained a cautious "neutral" rating and a target price of $660. Deutsche Bank is cautious, stating that it has been 18 months, but Netflix's significant revenue potential from advertising has not been confirmed and a lot of effort is still needed to expand advertising scale:
"Netflix not only has to compete with Google's Youtube and Amazon Prime Video for advertising customers, but also compete with social media short videos for users' time. Artificial intelligence tools may greatly reduce the threshold for producing high-quality professional videos and bring competitive risks."
Stock research firm MoffettNathanson raised its target price to $565 but maintained a "neutral" rating, admitting that Netflix has indeed made "significant progress" in cracking down on shared accounts of paid subscribers. The proportion of users accessing the platform through other people's family accounts has dropped from 15% at the beginning of the crackdown action a year ago to 9% in the first quarter of this year, but future efforts will be increasingly challenging.
In addition to the trend of adding new subscribers and generating advertising revenue, the market will also focus on Netflix's plan to open two "Netflix Houses" in Pennsylvania and Texas in 2025, providing immersive experiences that include "hot IP" commodities, food, and experiential products related to popular shows like Bridgerton, Stranger Things, and Squid Game.
Furthermore, some analysts point out that Netflix's price increase for its ad-free package is aimed at attracting more users to its advertising package. Canceling the cheapest ad-free package in the UK and Canada may also further fuel the development of advertising momentum.
Some analysts also suggest that Netflix's investment in gaming, live streaming, and sports-related content may bring good revenue growth, but it will have an impact on profits. Netflix is vigorously promoting cheaper ad-containing packages, and combined with higher digital marketing expenses, they may squeeze profit margins.
Editor/Somer