Netflix (NASDAQ: $NFLX) is the world’s leading streaming entertainment service, offering a wide variety of award-winning TV shows, movies, documentaries, animations, and more on devices connected to the internet. Headquartered in Los Gatos, California, the company operates in over 190 countries and boasts nearly 270 million paid memberships worldwide.
On Thursday, April 18, 2024, Netflix reported its first-quarter earnings for the fiscal year 2024, delivering a mixed pack of results to a negative market reaction.
Subscriber Additions Beat Expectations
One of the most closely watched metrics for Netflix is its subscriber growth, and the company did not disappoint in Q1. Netflix added 9.3 million new paid memberships during the quarter, surpassing Wall Street’s consensus estimate of 4.8 million. This strong performance follows a record 13 million net additions in Q4 2023 and marks Netflix’s best start to a year since 2020.
The strong subscriber gains can be linked to several factors, including the company’s crackdown on password sharing, the launch of its ad-supported tier, and the success of original hits like Fool Me Once and The Gentlemen.
Revenue and Earnings Exceed Forecasts
Regarding financial performance, Netflix reported revenue of $9.37 billion for the first quarter, beating Bloomberg’s consensus estimate of $9.27 billion and representing a 14.8% year-over-year increase. The company’s earnings per share (EPS) also exceeded expectations, coming in at $5.28 compared to the consensus estimate of $4.52.
Profitability metrics were also particularly impressive in Q1 earnings. The company’s operating margin stood at a strong 28.1%, up significantly from 21% in the same period last year. Also, free cash flow came in at $2.14 billion, above consensus calls of $1.9 billion.
Netflix Q2 Revenue Guidance Misses Expectations
Despite the strong Q1 performance, Netflix’s guidance for the second quarter fell short of analysts’ expectations. The company forecasted Q2 revenue of $9.49 billion, missing the consensus estimate of $9.51 billion. This disappointing outlook caused Netflix’s stock to drop more than 7% during the Friday, April 19, morning session.
Evolving Reporting Practices
In a surprising move, Netflix announced it will stop reporting quarterly membership numbers and average revenue per member (ARM) starting next year. The company cited its evolving pricing and plan structures and the varying business impact of each incremental paid membership as reasons for this decision.
Instead, Netflix will focus on reporting metrics such as operating income, operating margins, net income, free cash flow, earnings per share, and revenue. The company also plans to emphasize engagement metrics, which it believes are more indicative of long-term success in the streaming industry.
Password Crackdown and Ad-Tier Success
Two key initiatives contributing to Netflix’s recent success are its crackdown on password sharing and the launch of its ad-supported tier.
The company’s efforts to curtail account sharing have helped boost subscriber numbers, with many former password borrowers opting to sign up for their own accounts. Additionally, Netflix’s ad-tier memberships have continued to grow, now accounting for over 40% of all new sign-ups in the markets where it’s offered.
Expanded Content Offerings and Partnerships
To cement its dominance in the streaming age, Netflix is actively exploring new avenues for growth. In January 2024, the company signed a $5 billion deal to stream WWE’s flagship wrestling show, Raw, marking the first time in over three decades that the program will not be broadcast live on traditional television.
This move is part of Netflix’s broader strategy to expand into live events and diversify its content offerings. The company has also invested heavily in original programming, with plans to increase its content budget in the coming years.
Netflix Stock Performance
NFLX shares have experienced a strong run recently, with shares trading near the high end of its 52-week range. However, the company’s disappointing second-quarter revenue guidance caused its stock to drop 7.82% on Friday April 19 during the morning trading session.
While Wall Street analysts had warned that high expectations heading into the earnings report could pose risks to the stock price, Netflix’s strong subscriber growth and impressive profitability metrics may help mitigate any potential sell-off.
Should You Consider Buying Netflix Shares in 2024?
Netflix’s strong first-quarter results, highlighted by impressive subscriber growth and strong profitability metrics, make a convincing case for investing in the streaming giant’s shares. The company’s crackdown on password sharing and the success of its ad-supported tier have helped drive growth. At the same time, its expanding content offerings and partnerships position it well for the future.
However, investors should tread carefully, as Netflix’s disappointing Q2 revenue guidance and decision to stop reporting certain key metrics have raised concerns. Additionally, the stock’s recent run-up means it’s trading near its 52-week high, leaving less room for further upside. However, Netflix remains a dominant force in the streaming industry. Therefore, potential investors should carefully weigh their risk-reward ratio before buying NFLX shares.
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