To The Moon

• Netflix $Netflix(NFLX)$ closed down by 0.41% on Thursday and is trading 4.85% lower in after-hours trading due to an earnings forecast miss.

• Netflix stock is currently trading 11.47% lower than its all-time high in October 2021.

• Netflix remains one of the best-performing stocks among the S&P 500, providing a year-to-date return of +25.5%.

Recap of 1Q2024 Earnings

• Revenue, Operating Income, and Subscriber count have reached their all-time highs.

• Revenue increased by 14.8% year-over-year to USD 9.37 billion, surpassing the LSEG estimate of USD 9.28 billion.

• Operating Income surged by 28.1% year-over-year to USD 2.6 billion.

• EPS rose to USD 5.28 compared to the LSEG estimate of USD 4.52.

• Subscribers grew by 16% year-over-year to 269.6 million, representing an addition of 9.33 million subscribers, surpassing the street estimate of 265 million subscribers.

Source: Netflix

Source: Bloomberg

• Starting from 1Q2025, Netflix will cease reporting membership numbers and average revenue per membership (ARM). Major subscriber milestones will only be announced upon reaching them.

• Instead, Netflix intends for investors to focus on revenue and operating margin as their primary financial metrics, with engagement (i.e., time spent) serving as the best proxy for customer satisfaction.

• Average revenue per membership (ARM) increased by 1% year-over-year, or 4% on a FX-neutral basis.

• Ad-supported membership saw a 65% quarter-on-quarter growth (following nearly 70% sequential increases in both Q3’23 and Q4’23), with over 40% of all new signups in markets where the ad-supported plan is available opted for the ad-supported plan.

Forecast

In Q2’24:

• Netflix forecasts a 16% revenue growth, equivalent to a 21% growth on an FX-neutral basis.

• However, the forecasted revenue of USD 9,491 million for Q2’24 falls short of the street estimate of USD 9,530 million.

• Paid net additions are expected to decrease in Q2’24.

• Global ARM is projected to increase year-over-year in Q2 on an FX-neutral basis.

• Operating profit is anticipated to rise by 37.9% year-over-year to USD 2,520 million, with a Q2 operating margin estimate of 26.6%.

For the full year 2024:

• Netflix expects revenue growth of 13% to 15%.

• The expected operating margin for FY24 is now 25%, compared to the prior forecast of 24%.

• Netflix has hinted at its interest in expanding its live sports offerings.

• Netflix mentioned that its share of TV viewing is less than 10% in every country, indicating ample room for market share growth through the expansion of its product offerings.

Source: Netflix

Conclusion

• Netflix continues to lead the streaming industry in terms of revenue, operating income, and operating margin.

• While Q1 earnings were positive, lower-than-expected revenue and a reduced subscriber addition estimate for Q2 have dampened investor sentiment.

• As mentioned in a previous webinar, Netflix has implemented a password crackdown measure across most of its operating countries, resulting in increased subscriber additions and higher ARM. However, I think Netflix anticipates that the benefits of the password crackdown may diminish after a couple more quarters. This may be a key factor in the decision to cease reporting subscriber counts starting from 1Q2025.

• Some investors might interpret this cessation of ARM and subscriber count announcement decision as an indication that the company's growth trajectory has slowed.

• We believe the future growth drivers of Netflix lie not only in streaming but also in live sports offerings and advertising. Growth investors will still favor Netflix due to its huge addressable market.

• Netflix may have fallen victim tonight with a drop in share price as investors were expecting a flawless earnings season.

• Similar to TSMC's earnings announcement last night, Netflix's earnings result was actually positive.

• The current Netflix PE ratio appears reasonable at 42.5x, compared to a 5-year average of 59.6x.

• We remain constructive on Netflix's long-term prospects.

• Support levels for Netflix are at USD 568, USD 490, and USD 413 based on Fibonacci Expansion.

Source: Tiger PC App