Netflix Shares Jump on Big Paid Subscribers Beat, Despite Earnings Miss on Forex Losses

Streaming giant Netflix reported worse than expected fourth quarter earnings after the market close Thursday on foreign exchange losses or remeasurement. NFLX reported revenues in-line, paid net subscriber additions of 7.66 mln topped prior guidance. The company guided Q1 EPS below consensus, but revenues above consensus, saying it expects positive paid net adds yr/yr. Netflix appointed new co-CEOs, which at first glance seems confusing for investors.

NFLX stock traded up to $338.27 gaining $22.49 (+ 7.12%) after Hours.  Over the past twelve months, NFLX has traded in an extreme range between $162.71 and $526.64.

Wednesday (Season 1)

Netflix Inc NASDAQ: NFLX · Reported After Close Thursday

Netflix Q4 2022 Earnings

Q4 2022 earnings released after close 4:00 p.m.; conference call to follow.

  • EPS: $0.12 (exp $0.42)
  • Revenue: $7.85B (exp $7.86B)
  • Sees Q1 Revenue $8.17B (exp $8.17B)
  • Streaming Paid Net Change: +7.66M (exp +4.5M)
  • Hits such as ‘Wednesday’, ‘The Watcher’ and ‘Dahmer’ drove north American gains.
  • Streaming Paid Memberships: 230.75M (exp 227.3M)

Starting this quarter, Netflix will no longer provide guidance for its paid memberships but will continue to report those numbers during its quarterly earnings release.

NFLX: Stock Market Reaction

  • $336.05 ▲ +20.27 (+6.42%) Pre market
  • $336.05 ▲ +51.55 (+18.02%) YTD
  • $336.05 ▼ -171.95 (-33.83%) Over year
  • $336.05 ▲ +61.8 (+22.51%) Over 5 years
  • 52wk High $526.64
  • 52wk Low $162.71

Outlook

  • Sees a “modest” increase in new additions, with earnings in the region of $2.82 per share and revenues of $8.17 billion.
  • “We’re working to give people more choice when it comes to price as well as greater control over their Netflix account. In November, we successfully launched our new, lower priced ad-supported plan in 12 countries,”
  • “We believe branded television advertising is a substantial long term incremental revenue and profit opportunity for Netflix, and our ability to stand up this business in six months underscores our commitment both to give members more choice and to reaccelerate our growth.”
  • “While it’s still early days for ads and we have lots to do (in particular better targeting and measurement), we are pleased with our progress to date across every dimension: member experience, value to advertisers, and incremental contribution to our business.”

Earnings Insight

  • Netflix has risen above EPS estimates in 5 of the past 8 quarters and beating revenue expectations in 6 of those reports. BUT when it misses it misses big.
  • NFLX has a price-to-earnings ratio (P/E) of 28.27
  • NFLX price-to-book-value (P/BV) is 7.07
  • NFLX stock does not offer a dividend.
  • Over the past twelve months, NFLX has traded in an extreme range between $162.71 and $526.64.

Account Sharing

Netflix co-Chief Executive Greg Peters said the goal is to “nudge” users to the right price points, rumored to be between $3 and $4 per paid-shared account.

“We understand this will not be a universally liked decision, similar to raised prices that lead to churn for a period of time,” Peters said on a video call late Thursday. But the end result, he said, should eventually lead to increased revenue at more advantageous pricing for more users.

NFLX views account sharing as a significant factor in its performance. NFLX estimates that over 100 mln households are sharing. In NFLX’s view, it is wonderful that those users love the service, but NFLX knows that it needs to monetize their usage and doing so will be a key near-term focus.

“While our terms of use limit use of Netflix to a household, we recognize this is a change for members who share their account more broadly,” Netflix executives wrote in a letter to shareholders Thursday. “As we roll out paid sharing, members in many countries will also have the option to pay extra if they want to share Netflix with people they don’t live with.”

Netflix researchers have identified shared passwords as a major reason for eroding subscription growth since 2019, acknowledged it expects some “cancel reaction,” but the long-term benefits of people paying for additional accounts will result in “improved overall revenue.”

Ad Supported Streaming

“While it’s still early days for ads and we have lots to do (in particular better targeting and measurement), we are pleased with our progress to date across every dimension: member experience, value to advertisers, and incremental contribution to our business.”

Last quarter’s conference call Netflix teased the addition of its new lower-priced ad-supported plan, which launches in 12 countries in November. The company said it was “very optimistic” about its new advertising business. While it didn’t expect the new tier will add a material contribution to its fourth-quarter results, it foresees membership growing gradually over time. Its current forecast for subscriber growth is based on its upcoming content slate and the typical seasonality that comes during the last quarter of the year.

The company believes advertising can fuel substantial incremental membership (through lower prices) and profit growth (through ad revenues).

The ad-supported streaming business is viewed positively by J.P. Morgan last year with the firm forecasting $2.7B in revenue from the business by 2026 before these results. J.P. Morgan analyst Doug Anmuth, who has a neutral rating and $240 price target on Netflix (NFLX) said the new offering could help NFLX generate as much as $2.7B in revenue just from the U.S. and Canada over the next few years.

“The [U.S., Canada] ad-supported tier could generate overall revenue of $1.15B in 2023 and $4.6B in 2026, including incremental revenue of $350M in 2023 and $2.3B in 2026, which would drive 2% upside to our current 2023 estimates and 13% upside to 2026,” Anmuth wrote in a note to clients.

This would suggest Netflix has 7.5M advertising-supported subscribers by the end of next year, an incremental boost of 5%, generating some $600M in revenue. By 2026, that number could surge to 22M subscribers, accounting for a 19% incremental boost to Netflix’s (NFLX) subscriber count in the region, generating $2.65B in sales.

It all Changed for Netflix in 2022

Netflix this year saw heavy subscriber losses in the first quarter sending the stock down nearly 40% on the day after the report. In its Q1 report, Netflix shocked investors by reporting its first global net add subscriber decline in over a decade and guided to an even larger decline in Q2. NFLX management admitted that it misread the impact of the pandemic. COVID boosted subscriber growth a lot in 2020 and 2021. At the time, NFLX thought those results mostly represented pull-forward demand. Netflix conceded that it “believes most of [its] slowing growth in 2021 was due to the COVID pull forward.”

After years of downplaying the threat of competition, NFLX has changed its tune in the last two quarters and has admitted that competition has had an impact. $NFLX had said it doesn’t see Disney’s new service Disney+ with content from Fox Networks, Disney, Pixar, Marvel and Star Wars hurting. The last two earnings reports suggest that the streaming market has become saturated, especially in the US. Subscribers will become harder to get and keep.

Investor focus should shift from net add numbers to overall revenue and cash generation. Netflix enjoys huge advantages with a large subscriber base that has long been the envy of tech land. Key Competitors include, Amazon (AMZN), Apple (AAPL) Walt Disney (DIS), Paramount Global (PARA), Roku (ROKU), and Warner Brothers Discovery (WBD).

Since then, analysts have revised EPS estimates down 29 times and revenue down 36 times. Netflix is going through a transition right now. It was early to the streaming game, dominated and defined it for years.

You can clearly see its success has drawn others and now the competition is intense. It is also working out an ad tier and figuring out how to combat account sharing. The business model will look different in 2023.

Netflix Games

Netflix in the Q3 Release Updated on its gaming strategy.

Beyond TV and movies, we’re coming up on the one-year anniversary of our gaming launch. As we’ve said, this will be a multi-year journey for us to learn how to please game players. Our first year was about establishing our gaming infrastructure and understanding how our members interact with games. We now have 35 games on service (all included in every Netflix subscription without in-game ads or in-app purchases) and we’re seeing some encouraging signs of gameplay leading to higher retention.

With 55 more games in development, including more games based on Netflix IP, we’re focused in the next few years on creating hit games that will take our game initiative to the next level. More generally, we see a big opportunity around content that crosses between TV or film and games. For example, after the launch of the anime Cyberpunk: Edgerunners (49 million hours viewed) in Q3 use of CD Projekt’s game surged on PCs.

Netflix confirmed earlier in the year that it is in the early stages of expanding into games, building off of earlier endeavors around interactivity with “Black Mirror: Bandersnatch” and the company’s “Stranger Things” videogames.

“We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV,” Netflix executives said in a letter to shareholders

“Games will be included in members’ Netflix subscription at no additional cost similar to films and series.” “We really see this as an extension of our core product offering” and not as a separate profit pool, Netflix Chief Operating Officer Greg Peters said. He characterized the gaming push as a multiyear effort that will start “relatively small” and “continuously improve, based on what members tell us what is working.”

We look forward to how this plays out. Netflix sees a chance to differentiate its gaming experience, Peters added, around its vast library of intellectual property and will focus on mobile devices and TV set-top boxes.

“There is a rich opportunity to improve quality-of-game experience,” one that lets fans of Netflix’s original content “go further and put their [gaming] energies there.” “We are a one-product company with a bunch of supporting services,”

Netflix co-Chief Executive Reed Hastings said during the video call. Diversifying into games was inevitable, given the brutal competition with media giants such as Walt Disney Co. (DIS), Apple Inc. (AAPL), AT&T Inc. (T), and slackening growth of new net paid additions later this year for Netflix, which also missed Q2 earnings estimates.

Gaming Challenges

It could lead to a confrontation with Apple.

Netflix would need approval from the App Store to stream multiple games from its mobile app on iPhones and iPads. Apple already quashed attempts by Microsoft Corp. Corp. (MSFT) and Facebook Inc. (FB) to do so.

A major component of Epic Games Inc.’s high-profile antitrust lawsuit against Apple is that App Store has restrictions that aren’t tenable for some developers, creating a lopsided competitive landscape for Apple Arcade, a videogame subscription service available on iOS. Apple allows services that stream movies to offer them all in a single app, but forces services that stream games to separate each game for individual listing and review.

“I can use Netflix with a native app and I can see lots of different movies or TV shows or whatever. Is it that you didn’t want to use a subscription model?” a confused Judge Yvonne Gonzalez Rogers asked at one point during the three-week Apple-Epic trial in May.

Executives from Microsoft and Nvidia Corp. (NVDA) testified about the technological hoops they were made to jump through, at Apple’s request. Lori Wright, vice president of business development at Microsoft, said the software giant spent four months discussing with Apple how to launch xCloud as a native app, only to claim Apple demanded Microsoft, Nvidia, and others list cloud games as separate apps.

Submitting Xbox games one-by-one was too onerous, Wright said, forcing Microsoft to resort to making a web app. This not only represented a technological hurdle for Microsoft, she said, but also inconvenienced consumers. Users aren’t used to installing apps from the web on their iPhones.

“There are less controls over the streaming, so you could argue in some ways it’s worse” than a native app, said Aashish Patel, Nvidia’s director of product management.

Netflix could face the same restrictive scenario

Changing Structure and Pricing?

Netflix’s entry into gaming could change everything up according to analysts.

AB Bernstein analyst Todd Juenger said in a July 15 note

“One option/solution/path Netflix could take would be to segregate video games into the Premium tiers of service,” Juenger said. “For example, if you want videogames, maybe you need to subscribe to the Premium (4S) Plan. If you don’t want them, you can subscribe to the Basic (1S) or Standard (2S) Plan.

That pricing strategy would require Netflix to deviate from a core product tenet they have so far held sacred, which is that all Netflix members have access to all content (that’s available in their market).” “Another option Netflix could choose would be to characterize the games as ‘free-to-play,’ as for so many successful videogames,” Juenger wrote. “The trick here is to ensure subscribers who don’t want videogames believe that they really aren’t’ paying’ for them.”

Morgan Stanley analyst Benjamin Swinburne in a July 16 note.

“The risks and points of caution reflect the lack of success other even larger consumer tech platforms have had despite significant effort and investment… To succeed in gaming will require a significant shift in resources and priorities for the company.” Swinburne points to the struggles of Amazon.com Inc. (AMZN) and Google parent Alphabet Inc. (GOOGL)(GOOGL) in expanding their cloud-based game distribution platforms, Luna and Stadia, respectively, because of “a lack of unique content offerings and technology limitations.”

Netflix Competitors

Netflix now counts TikTok among its rivals.

“TikTok’s growth is astounding, showing the fluidity of internet entertainment,” the company wrote to shareholders. “Instead of worrying about all these competitors, we continue to stick to our strategy of trying to improve our service and content every quarter faster than our peers. Our continued strong growth is a testament to this approach and the size of the entertainment market.”

Walt Disney rolled out its much-awaited streaming service Disney+ last year, intensifying competition in the streaming arena. Armed with a huge repository of original content, gathered after the recent acquisition of the media assets of 21st Century Fox (FOX), Disney is all set to change the on-demand video streaming landscape.

Amazon (AMZN) Prime Video, AT&T (T) Time Warner, and Hulu have been ramping up their technical infrastructure and content portfolio, targeting a slice of Netflix’s market share.

“Questions have included expected announcements from Apple/Disney (as a possible reflection of future competition), pricing power vs. churn (impact on [long-term] margins vs. [short-term sub dynamics) and what content slate investments might yield against forward growth.

Content Library and Costs

Walt Disney Co. $DIS pulled its films off Netflix at the end of 2020 and launched its own streaming service in 2019 that will become the exclusive home for Disney, Pixar, Marvel and Star Wars films.

Millarworld 1

Netflix has made moves on this front with it’s First Acquisition With Comic Publisher Millarworld getting aggressive back in 2018. From there content costs have only gone up sharply.

Source: NetFlix, TradersCommunity,

Live From the Pit

From The TradersCommunity Research Desk