Streaming video giant Netflix (NASDAQ: NFLX) reported results in line with analysts' expectations in Q3 FY2023, with revenue up 7.77% year on year to $8.54 billion. The company also expects next quarter's revenue to be around $8.7 billion, slightly below analysts' estimates. Turning to EPS, Netflix made a GAAP profit of $3.73 per share, improving from its profit of $3.10 per share in the same quarter last year.
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Netflix (NFLX) Q3 FY2023 Highlights:
- Revenue: $8.54 billion vs analyst estimates of $8.54 billion (small beat)
- EPS: $3.73 vs analyst estimates of $3.50 (6.68% beat)
- Revenue Guidance for Q4 2023 is $8.7 billion at the midpoint, below analyst estimates of $8.77 billion
- Free Cash Flow of $1.89 billion, up 41% from the previous quarter
- Gross Margin (GAAP): 42.3%, up from 39.6% in the same quarter last year
- Global Streaming Paid Memberships: 247.2 million, up 24.1 million year on year (net adds beat across all geographies)
Launched by Reed Hastings as a DVD mail rental company until its famous pivot to streaming in 2007, Netflix (NASDAQ: NFLX) is a pioneering streaming content platform.
Consumer Subscription
Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to, what movie they watch, or even finding a date, online consumer businesses are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have further increased usage and stickiness of many online consumer services.
Sales Growth
Netflix's revenue growth over the last three years has been unremarkable, averaging 11.5% annually. This quarter, Netflix reported mediocre 7.77% year-on-year revenue growth, in line with what analysts were expecting.
Guidance for the next quarter indicates Netflix is expecting revenue to grow 10.8% year on year to $8.7 billion, improving on the 1.85% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 12.8% over the next 12 months.
The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
Usage Growth
As a subscription-based app, Netflix generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.
Over the last two years, Netflix's users, a key performance metric for the company, grew 6.67% annually to 247.2 million. This is average growth for a consumer internet company.
In Q3, Netflix added 24.1 million users, translating into 10.8% year-on-year growth.
Key Takeaways from Netflix's Q3 Results
With a market capitalization of $158 billion, a $7.87 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Netflix has the resources needed to pursue a high-growth business strategy.
While the company’s revenue was roughly in line with expectations, streaming net adds (essentially the company’s paying customers) beat across all geographies. This would normally be a positive, but this quarter, there is probably some added enthusiasm around it since Netflix rolled out paid sharing, which came with some skittishness among investors about whether some subscribers would leave. EPS beat by a more convincing fashion. Looking forward, Q4 revenue guidance was below expectations but the company bullishly raised its full year outlook for both operating margin and free cash flow. Lastly, Netflix bought back $2.5 billion in shares this quarter, well above the $1+ billion in buybacks for the first six months. With a fresh new buyback authorization and a higher free cash flow outlook, repurchase activity could remain strong, which many investors will cheer. Overall, the results weren't perfect but were quite strong, especially amid fears about what the paid sharing development could do to churn. The stock is up 11.6% after reporting and currently trades at $386.31 per share.
Netflix may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
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The author has no position in any of the stocks mentioned in this report.