Investors are looking to Netflix’s Q3 earnings report, with the focus on the paid sharing progress, ad scale average revenue per membership (ARM), and operating margin trajectory.
Netflix will post its third quarter 2023 financial results and business outlook post-market on Wednesday, October 18, 2023. Netflix's Q3 revenue is expected to be $8.54 billion, with an adjusted net profit of $1.582 billion and an adjusted EPS of $3.575, according to Bloomberg's consensus expectation.
Previous quarter review
Netflix’s second-quarter sales rose 2.7% to $8.19 billion, coming in slightly below analysts’ projections. That was due in part to foreign exchange rates and to price cuts in some markets. Second-quarter earnings, at $3.29 a share, beat the $2.85 a share average of analyst estimates.
The company’s forecast for third-quarter revenue of $8.52 billion was also shy of Wall Street estimates, which average $8.67 billion. The company said revenue from advertising and add-on memberships to people who share passwords were not material enough to offset other factors, such as a lack of price increases.
The shortfall overshadowed a solid quarter of subscriber growth. Netflix added 5.89 million customers in the second period, more than doubling Wall Street estimates after cracking down on people who share their passwords.
What will we focus on in Q3?
Netflix may report softer margins in Q3
Netflix is bracing for an uninspiring 3Q despite the success of its password-sharing crackdown (100 million global sharers), given that it expects flattish average revenue per member (ARM) despite forecasting roughly 6 million new additions, as in 2Q.
The advertising business hasn't taken off in a meaningful way either, suggesting a gradual build. That's weighing on its goal of double-digit revenue-growth reacceleration, with subscriber volume the key engine in 2023 vs. 2024, when ARM will get a boost, especially as the streamer plans to raises prices. Solid revenue gains will drive operating-margin expansion.
Despite the underwhelming 7.5% revenue guidance for 3Q, Netflix will likely overshoot 2023 free-cash-flow guidance of $5 billion as the actors’ strike drags on, causing production delays.
Ad tier not material yet
Netflix CFO Spencer Neumann warned that advertising business will take time to mature.
"We're still in the crawl of the crawl-walk-run stage, so it is not easy to build an ad business from scratch. We got a lot of work to do," he said.
He added that "as you've seen in our guidance, what we've done so far is not material to the overall revenue of the business. It's something we're building into and we have to get better across the board."
Neumann said the company needs to "scale the reach" of its ad tier, explaining, "Advertisers want a scaled solution. So that is the No. 1 priority. And then No. 2 is to better monetize that reach."
Still, the executive said he's bullish over the long term, revealing the company met its ad expectations at its first Upfronts and that the rate of new subscribers signing up for the ad tier is "healthy," although he wouldn't provide a specific number.
Analysts’ opinions
JPMorgan maintains a Buy rating and $455 price target
"We remain positive on NFLX overall, but we recognize there is a growing list of questions into 3Q earnings w/the Street looking for more clarity around recent conference comments, ad business leadership changes, and whether a softer margin trajectory is coming from a position of competitive strength or slower growth (or both)," the analysts said.
The firm estimates NFLX will have cumulative borrower monetization of 18 million by the end of 2023, 30 million by the end of 2024, and 37 million by the end of 2025. In addition, they estimate 10 million ad tier subscribers at the end of 2023, "which would mean 20M+ MAUs/viewers, which could prove optimistic."
Citi maintains a Buy rating and $500 price target
Analysts at Citi said the set-up has three facets.
"First, the good news: Netflix continues to take share of video viewing and the ad tier still has significant upside potential. Second, the neutral news: We expect Netflix to report results in line with the Street on all key metrics. Third, the bad news: consensus estimates for 4Q23 and 2024 may need to come down for revenues and margins," the analysts explained.
"To us, this suggests bearish tactical positioning may be reasonable. But, once sell-side estimates get reset, we believe Netflix remains a compelling Buy as rivals increase pricing and moderate content spending opening up a window for Netflix to distance itself from rivals," they added.
TD Cowen reiterates Netflix as outperform
TD Cowen lowered its price target on the stock to $500 from $515 but said it’s standing by its outperform rating heading into earnings next week.
“Near-term, we think investors will look for net adds in 3Q & color around 4Q net adds, updates on NFLX’s
monetization efforts (paid sharing & ad tier) when the co reports 3Q results, and color around intermediate term margins & FCF.”
Goldman Sachs reiterates Netflix as neutral
Goldman said it’s standing by its neutral rating heading into earnings next week.
“In terms of the upcoming earnings report, we expect Netflix to report above Street modeled subscriber performance as a mixture of continued password crackdown execution, relative strength vs. competition in terms of breadth & depth of content on the platform (against the backdrop of strikes), and varying price points stimulate demand.”
Seaport initiates Netflix as buy
Seaport said it sees plenty of upside in shares of Netflix.
“Early stages of converting ‘borrowers’ (password sharers) and entrée into advertising has helped 73 sentiment, but we think there is plenty of upside if NFLX can capture fair share of the global ad market.”
