Subscriber change is the most important part of Netflix’s earnings report, as it is the key aspect gauging the company’s growth prospects.
Netflix will post its second quarter 2023 financial results and business outlook on Wednesday, July 19, 2023. Its earnings results will be a critical parameter for market sentiment after a strong bull run of tech stocks in the first half of the year. Subscriber change is the most important part of Netflix’s earnings report, as it is the key aspect gauging the company’s growth prospects.
Netflix's Q2 revenue is expected to be $8.28 billion, with an adjusted net profit of $1.313 billion and an adjusted EPS of $2.901, according to Bloomberg's consensus expectation.
Netflix's stock has surged by over 50% this year. The earnings report might help the stock continue to move higher if these key numbers are better than expectations.
Previous quarter review
In the first quarter, Netflix added 1.75 million new subscribers, in line with consensus but declining from 7.66 million the previous quarter. Netflix’s global users reached 232.5 million globally by the end of the first quarter. Earnings per share were $2.88, beating market expectations of $2.86, while revenue recorded at $8.16 billion, missing analyst estimates.
Earnings and revenue projections disappointed after Netflix revealed it anticipates earning $2.84 per share on $8.24 billion in the second quarter, below Wall Street forecasts for earnings of $3.05 per share on $8.5 billion in revenue.
The company, which raised its full-year free cash flow projection to $3.5 billion from $3 billion, said it will stay around its $17 billion annual content spend through 2024 but added there's more room to grow.
What will we focus on in Q2?
Netflix's dual initiatives of an ad-based tier as well as password policing could start to bear fruit in 2Q with the streamer benefiting from new subscriber gains and a bump in average revenue per user (ARPU). Strong execution can set it up to exceed 2Q consensus for 1.85 million adds on encouraging data, including 5 million active users on its ad tier as of May and an uptick in US signups following the password crackdown. Paid sharing has been rolled out in 100-plus markets and, while some churn is expected, it could serve to turbocharge new users on the cheaper ad tier in select markets. Meanwhile, the "extra member" fee could help boost ARPU.
Acceleration in revenue growth through 2H may spur a wider operating margin and 2023 free cash flow of around $4 billion, by Bloomberg’s calculations.
Business growing focus
For Netflix, its newly launched ad-supported tier and password-sharing crackdown policy are the focus of the upcoming earnings report, as the company believes the two strategies will help it accelerate users and boost profits. By May, the streamer had added 5 million active users in its ad-supported tier for the first six months after its launch in November 2022. The company has an ambition to grow 13 million new subscribers to the new program by the third quarter of 2023. The target looks like still within reach at the current pace. According to Netflix’s co-CEO Greg Peters, over 25 percent of new signups choose the ad-supported tier in countries where it is available.
The company has pushed back the broad rollout of its password-sharing crackdown in January. It officially commenced the policy in the US and globally in May, as cancellations saw in the countries where it already launched. The measure might cause a bump in user and revenue growth but will increase subscribers and income in the long haul.
Moreover, Netflix’s ad-supported plan could also potentially start playing a bigger role in the context of Netflix’s overall business. The company upgraded the streaming resolutions on the plan to 1080p (up from 720p) while supporting two concurrent streams. Netflix has also indicated that the average revenue per membership for its ads plan has already exceeded its standard plan, accounting for both subscription fees and advertising revenues.
Analyst opinion
Netflix price target raised to $495 from $470 at JPMorgan
The Netflix price target was raised to $495 from $470 at JPMorgan, with analysts maintaining an Overweight rating on the stock. They said the firm remains positive on the stock into its second-quarter earnings, with a paid sharing lift this year.
"As a result, we are tweaking our 2Q net adds higher from 1.0M to 2.5M. Our 2.5M estimate is essentially in-line with Netflix's expectations for 2Q net adds 'roughly similar to 1Q,' which was 1.75M, & broader investor expectations for 3M+," the analysts added. "We now project net adds of 2.5M in 2Q, 6.75M in 3Q, & 10M in 4Q, bringing 2023 total net adds to 21M. More importantly, we’re modeling strong revenue acceleration from +6.4% FXN Y/Y in 2Q ($8.37B, guide of $8.24B) to +11.8% FXN Y/Y in 3Q ($8.95B), & to +19.1% FXN Y/Y in 4Q ($9.48B)."
Netflix price target raised to $525 from $390 at UBS
The UBS analysts raised their target price on the stock to $525 from $390 and reiterated a Buy rating, valuing the company at 23 times its expected earnings before interest, taxes, depreciation and amortization in 2024. UBS expects the company to add 3.6 million subscribers for the quarter, beating the Wall Street consensus of 2.1 million. And UBS expects Netflix to add 8 million subscribers this year, with the number jumping in the second half.
Netflix price target raised to $450 from $350 at Morgan Stanley
Morgan Stanley analyst Benjamin Swinburne maintains Netflix with a Equal-Weight and raises the price target from $350 to $450. The analysts, who have an Equal-Weight rating on the stock, told investors that while the firm is "bullish on Netflix the business, they see a balanced risk/reward and prefer to wait for a better entry point."
The analysts also noted that Netflix's paid sharing price points suggest more net adds than extra members compared to the firm's prior forecast, they believe "Netflix is poised to demonstrate how good a business streaming can be at scale."
