To The Moon

$Netflix(NFLX)$ reported its third-quarter earnings, beating expectations on both earnings per share (EPS) and revenue, while also surpassing subscriber growth estimates. On the surface, these results might seem like a big win for Netflix, especially with ad-tier memberships jumping 35% quarter-over-quarter. However, I believe this growth might not be as organic as it appears. While Netflix remains a stable and profitable business, I see some red flags regarding the sustainability of its future growth.

Breaking Down the Numbers

First, let’s look at the key figures from Netflix’s Q3 report:

• Earnings per share: $5.40, beating expectations of $5.12.

• Revenue: $9.83 billion, surpassing estimates of $9.77 billion.

• Paid memberships: 282.7 million, narrowly beating expectations of 282.15 million.

On the surface, Netflix delivered solid results, but the real story lies in the future guidance and the company’s evolving revenue strategy.

Lower EPS Guidance and Slower Revenue Growth

Netflix's guidance for Q4 is somewhat concerning:

• Revenue is expected to grow to $10.13 billion, a modest 3% increase from Q3.

• Earnings per share are projected to decline to $4.23, a 22% decrease compared to the previous quarter.

This significant drop in EPS despite continued revenue growth signals rising costs or lower profitability going forward. For a company that has traditionally been focused on subscriber growth, the EPS drop shows that the cost of maintaining or expanding its subscriber base may be eating into profits.

The 35% Jump in Ad-Tier Memberships: Misleading?

One of the more eye-catching numbers was the 35% quarter-over-quarter jump in ad-tier memberships. This was framed as a significant win for Netflix’s new advertising business. However, I believe this figure could be misleading. It’s very likely that many of these “new” ad-tier memberships aren’t new subscribers, but rather existing paid members who downgraded to the ad-supported version of the service.

The ad-tier allows users to access Netflix at a lower price, but with ads. In an inflationary environment where consumers are looking to cut back on discretionary spending, it’s natural to assume that a sizable portion of Netflix’s existing users would downgrade to the cheaper ad-supported option. In other words, the 35% growth in ad-tier memberships may not represent organic subscriber growth—it could be driven by downgrades rather than new sign-ups.

Netflix’s decision to stop reporting paid memberships going forward also raises some questions. This is clearly a shift toward focusing on other revenue streams, such as advertising. While ad-supported streaming is a growing revenue channel, it’s hard to gauge how successful Netflix’s overall subscription business is without the paid membership metric.

By phasing out this reporting, Netflix might be trying to manage investor expectations around subscriber growth, which has been the key driver of its stock price for years. In doing so, they may be implicitly signaling that paid membership growth is slowing or plateauing. With Netflix increasingly focused on ad revenue, the core business model is evolving, but the transparency around this shift is diminishing.

Despite these concerns, Netflix still has room to grow in parts of Europe, the Middle East, and Japan. These regions represent significant untapped markets where Netflix could still capture more users. However, it’s worth noting that expanding into new regions often requires significant investments in content tailored to local tastes and preferences, which could further strain Netflix’s margins.

While there’s still growth potential, it’s unclear whether Netflix can replicate the kind of success it saw in North America and other established markets. Content costs will likely rise as Netflix tries to compete with local streaming services and other global competitors, meaning that revenue growth from these regions could come at a higher cost.

NFLX 4H Chart shows price does not have clear trend

My Outlook

In my view, Netflix has transitioned from being a hyper-growth tech company into more of a stable, cash-generating business. With a global footprint, strong brand recognition, and a profitable ad-supported tier, the company has solidified its position in the streaming market. However, I believe the days of rapid, organic subscriber growth are largely behind it.

Given these factors, Netflix feels fairly priced at its current valuation. The company is not facing an imminent collapse, but it’s also not on the brink of a major growth spurt. Instead, Netflix appears to be entering a period of steady, but slower, growth. For long-term investors, this might still be an attractive proposition, but for those looking for high growth or explosive returns, Netflix may no longer fit the bill.

Final Thoughts

Netflix’s Q3 results are solid on paper, but the underlying metrics suggest that the company’s growth story is evolving. While the advertising business has potential, I remain skeptical of the true extent of the 35% growth in ad-tier memberships. With lower future EPS guidance and a shift away from reporting paid memberships, Netflix is clearly moving in a different direction, one that could be more focused on monetizing existing users rather than growing its subscriber base.

For now, Netflix remains a reliable, cash-generating business, but I’ll be watching closely to see how well they manage this transition.

Could Netflix still surprise us with stronger growth in untapped markets?

Or are we seeing the beginning of a more conservative growth phase for the streaming giant? Only time will tell.

@MillionaireTiger @Tiger_comments @Daily_Discussion @CaptainTiger @TigerSG

Disclaimer: This is a general analysis and not financial advice. Always conduct your own research before making any investment decisions.