The world’s largest video streamer, Netflix, beat market expectations in its first-quarter earnings. However, the robust results failed to lift its share price due to weaker-than-expected guidance.

Netflix (NDX: NFLX) reported first-quarter earnings that blew away analysts' forecasts in all aspects. The positive earnings result did not bolster its share prices, however, due to disappointing guidance for the current quarter. Netflix’s shares fell more than 4% in after-hours trading at Nasdaq, indicating a lower open for the stock today.

Netflix’s subscriber growth accelerates

The company added 9.33 million users in the first quarter, bringing its total subscribers to 296.6 million, further solidifying its leadership in the streaming market. The figure almost doubled analysts’ forecast of 4.9 million, representing a 16% increase from the same quarter last year. 

However, the pace of growth moderated from the fourth quarter of 2023, during which the company added 13.1 million. The surge in users is primarily attributed to the ad-tier-supported plan and its measures to crack down on password-sharing by customers.

Netflix beat expectations in the first quarter, reporting earnings per share of $5.28, topping an estimated $4.49. Its revenue stood at $9.37 billion, up 15% from a year ago, surpassing the expected $9.29 billion. The operating margin also saw improvement, rising to 28% from 21% a year ago.

• Netflix price hikes on the horizon as sign-ups surge
• Netflix first quarter earnings preview: Subscriber growth in focus

Netflix forecast a revenue growth rate of 16% for the second quarter. For the fiscal year 2024, revenue growth is projected to be between 13% and 15%, with an operating margin of 25%. This suggests a slower pace of growth in the second half of the year. It also indicated that the subscriber increment would slow down due to seasonality. 

Netflix's guidance is slightly short of market expectations, leading to a decline in its share price. Investors may have reacted to the tempered growth projections for the remainder of the year.

Netflix shifts business focus

In a notable move, Netflix will stop providing quarterly paid membership guidance in 2023. It will also no longer report quarterly subscriber numbers starting in 2025. Instead, Netflix will shift its focus from user growth metrics to more traditional indicators such as profit margin and revenue growth. 

In its shareholder letter, Netflix said “now we’re generating very substantial profit and free cash flow (FCF). We are also developing new revenue streams like advertising and our extra member feature, so memberships are just one component of our growth.” The strategic change reflects the recent developments in the cheaper version of its ad-supported plan and the partnership with TKO Group Holdings for live sports streaming.

• Reddit’s market value climbs to almost $10 billion following IPO debut
• Ads are coming to Amazon Prime Video. Why are streaming companies turning to commercials?

Since the final quarter of 2023, Netflix's pursuit of live-streaming sports programming has emerged as a pivotal strategy for bottom-line growth. CEO Ted Sarandos remarked, "We are in the very early days of developing our live programming, and I would view this as an expansion of the types of content we offer, akin to our expansions into film, unscripted content, animation, and most recently, games." This highlights Netflix's commitment to diversifying its content portfolio and embracing new avenues for audience engagement and revenue generation.

Netflix’s share trajectory

In 2022, Netflix faced significant challenges, experiencing a steep decline in its share price of 76% from its peak of $700 per share in November 2021 to just over $162 per share by May 2022. This downturn was attributed to various factors including the post-pandemic impact, intense competition from rivals like Disney+, and broader macroeconomic headwinds. In response to these challenges, the company implemented a strategic shift towards introducing an ad-tier model and cracking down on password sharing.

This change in approach yielded positive results, leading to a notable turnaround in user growth and net income. As a result, Netflix's share price surged by an impressive 350% from its low point in June 2022. With its shares poised to open at $581 after a pre-market drop today, Netflix is on track for a significant recovery, standing approximately 26% below its all-time high. This resurgence underscores the company's resilience and its ability to adapt to evolving market conditions, positioning it for continued growth and success in the competitive streaming landscape.

Netflix’s current Price-to-Earnings (P/E) ratio is at approximately 49, higher than most US big tech companies. For instance, Microsoft holds a P/E ratio of 37, Apple stands at 26, and Alphabet registers at 27. However, considering the company’s growth potential, its stocks may not be necessarily overvalued.

REFERENCES

1. Teng, T. (2024, April 19). Netflix beats market expectations but sees share dip on weak guidance. CNET. Retrieved from https://www.cnet.com
2. Lee, J. (2024, April 20). Analysis: Netflix's strategic shift towards advertising and live sports. Bloomberg. Retrieved from https://www.bloomberg.com
3. Kim, H. (2024, April 20). Netflix's earnings overview: What investors need to know. Forbes. Retrieved from https://www.forbes.com
4. Chen, B. (2024, April 19). Netflix's plans to phase out subscriber growth metrics in favor of profit and revenue. The Wall Street Journal. Retrieved from https://www.wsj.com
5. Patel, S. (2024, April 20). Netflix navigates post-pandemic challenges with a focus on long-term growth. Financial Times. Retrieved from https://www.ft.com