Here's Everything You Need to Know About Netflix's Latest Earnings Report

$Netflix(NFLX)$   shares climbed over 6% in pre-market trading Friday, following the release of third-quarter earnings that surpassed Wall Street expectations across major metrics. The stock has seen a more than fourfold increase since May 2022, rebounding from a period of slow growth that had previously rattled investors.

The streaming giant reported $5.40 per share earnings, up from $3.73 a year earlier, topping the FactSet consensus of $5.12. Revenue rose to $9.83 billion from $8.54 billion, exceeding expectations of $9.77 billion.

Operating income soared 52% year-over-year to $2.9 billion, with a 30% operating margin, marking a seven-point improvement from the previous year. These results outperformed Netflix's guidance forecast, aided by slightly higher revenue and efficient expense timing.

Q3 Subscriber Growth and Q4 Outlook

During the quarter, Netflix added 5.1 million subscribers, exceeding estimates and alleviating concerns about its ability to produce compelling new content. The crackdown on password sharing has been particularly instrumental in driving subscriber growth, with over 60 million new subscribers since the policy was implemented.

In Q4, Netflix expects subscriber growth to accelerate, spurred by seasonal trends and high-profile content releases such as 'Squid Game' Season 2 and the much-anticipated Jake Paul/Mike Tyson fight.

Good Progress in Advertising Business 

Netflix reported a 35% growth in its ad-supported membership quarter-over-quarter, highlighting the potential of the advertising business to attract more subscribers and accelerate revenue growth. 

Advertising is poised to be a major revenue contributor for Netflix, with strategies centered on expanding the ad-supported membership base and improving ad monetization. In the coming years, enhancing the value proposition for advertisers remains a key focus for Netflix. The company is initially preparing to roll out its in-house advertising technology platform in Canada this quarter, with plans for a broader launch across other markets in 2025. 

Well-going partnerships with the Trade Desk and Google are also enhancing Netflix's capabilities in the advertising domain, which is anticipated to be a significant driver of future revenue.

Europe and Asia Remain the Main Drivers of User Growth

While North America has seen slowed growth following a recent price increase, Europe and Asia have emerged as the principal regions for user expansion. This quarter's highest regional growth rates were seen in the UK, France, Germany, Japan, and India, supported predominantly by Netflix's increased investment in local content. 

Latin America experienced a slight decline this quarter. However, early indicators for the fourth quarter suggest a potential rebound in Latin American subscriber numbers, helped by regional content like 'Senna' and 'A Hundred Years of Solitude.'

The 2025 Financial Guidance Meets Expectations

Netflix reported an operating profit of $2.9 billion for the third quarter, marking a 52% increase from the previous year and showing accelerated growth from a strong base last quarter. This surge in profitability can largely be attributed to rigorous cost control measures alongside a robust 15% revenue growth. As a result of these factors, Netflix has upgraded its free cash flow projection from the previously estimated $5-6 billion to $6-6.5 billion. 

Anticipating continued success in curbing account sharing, bolstering advertising revenue, and benefiting from recent price hikes and future strategic investments in content, Netflix has also revised its operating profit margin targets, setting them at 27% for 2024 and expecting to reach 28% by 2025.

The company anticipates steady growth in membership and Average Revenue Per Member (ARM), projecting a robust revenue increase to between $43 billion and $44 billion by 2025.

Additionally, Netflix's expansion is set to be propelled by an overall increase in streaming adoption and further gains in market share. The chart below illustrates that the streaming sector is eroding the traditional cable market's share. This trend is expected to accelerate, with more young consumers likely moving away from cable to embrace online streaming options in the near future.

Analysts' Comments

In the most recent analyst rating updates, Goldman Sachs has raised its target price for Netflix from $705 to $750, and Piper Sandler has increased its target price to $840 up from $800.

Commenting on Netflix's latest quarterly results, Bloomberg Intelligence analyst Geetha Ranganathan stated, "Netflix's 5.1 million user gains in 3Q were slightly above consensus, but the big positive surprise was another increase in the 2024 operating-margin target -- to 27% -- implying over 600 bps of expansion. Even with the specter of higher content investments, a 28% margin target for 2025 looks conservative, and guidance for 11-13% revenue growth has upside if there's a price hike and the advertising business ramps up."

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