Futu Research | Netflix's second quarterly report has excellent results, but the market is worried

$Netflix (NFLX.US)$The financial results for the second quarter of 2024 were released after the US stock market on July 18, EST. Despite the company's outstanding performance, the stock price fluctuated after the earnings report was released, mainly due to market concerns that the next quarter's performance guidance fell short of expectations and the gradual contraction of cash flow.

As the world's leading streaming company, the vast majority of Netflix's revenue comes from user subscriptions. Therefore, the number of subscribers and average monthly gross revenue per paying user (ARM, Average Revenue per Membership) have become core indicators for measuring Netflix's performance growth, and are also key dimensions for analyzing Netflix's performance in the second quarter of 2024.

1. The number of new subscribers exceeded expectations, and the number of advertising package users increased significantly

The company's performance growth this quarter was still mainly due to an increase in the number of subscribers.24Q2's revenue increased 16.8% year over year to 9.56 billion US dollars, with 8.05 million new subscribers, surpassing Bloomberg's agreed expectations of 4.702 million. The total number of subscribers was about 0.278 billion, YoY +16.5%. Apart from the number of subscribers, ARM's average monthly total revenue per paying user did not change much. Therefore, the company's performance this quarter was still driven by the growth in the number of users.

Figure: Net increase in subscribers from 19Q3-24Q2 (unit: thousand people)

Source: Company's official website

The increase in the number of subscribers is mainly driven by the growth in the number of ad package users.Since 2023, Netflix has resumed growth in the number of new subscribers due to two key factors. One is the crackdown on shared accounts, and the second is the launch of low-cost ad-inclusive packages. Over time, the conversion rate of stock shared accounts continued to rise, and the impact of the shared account policy crackdown has begun to weaken, and the appeal of low price packages with ads to new users continues to increase, especially in the face of US inflation and high interest rates, driving the increase in the number of new users in the second quarter. According to the company's disclosure, the number of ad members increased 34% month-on-month in the second quarter. Meanwhile, according to data disclosed by the company in May, MAU (Monthly Active Users/Monthly Active Users) with subscriptions including advertising services has reached about 40 million, almost double the 0.23 million in January '24.

By region, the Asia Pacific region contributed the most number of new users.The net increase of paying users in the 24Q2 North American market was 1.45 million, up 24% year on year; the Asia-Pacific region had a net increase of 2.83 million, double the 164% increase; the EMEA region in Europe, the Middle East and Africa had a net increase of 2.24 million, down 7.8% year on year; and the Latin American market had a net increase of 1.53 million, up 25% year on year. Currently, the penetration rate in the Asia-Pacific region is relatively low. By increasing the production of local content, the company hopes to increase the penetration rate in the Asia-Pacific region, and countries such as Japan, Indonesia, and India are expected to become the main sources of contributing new users.

2. ARM remains stable, and advertising revenue is still unable to contribute significant revenue in the short term

24Q2's ARM increased by about 1% year over year and remained stable, but lower than Bloomberg's agreed expectations.

Figure: Changes in 19Q3-24Q2ARM (Unit: USD)

Source: Company's official website

The company's ARM growth is mainly due to an increase in membership prices and an increase in advertising revenue.In terms of membership prices, although the company has continuously increased prices by 11%-22% on subscription services in some countries and regions since 23Q4, considering that new users mainly buy low-cost advertising packages, this has hedged ARM's growth caused by price increases.

Looking at it now, since the advertising business has not achieved significant revenue growth, it is difficult for the company ARM to improve.According to the company's management disclosure, in the landing advertising layer market, the proportion of users choosing the advertising layer has reached 45%, an increase of 5 percentage points over the previous quarter, but advertising monetization capabilities have not kept up, so advertising revenue has not increased significantly, nor has ARM.

Furthermore, the company does not expect advertising to be the main driving force for revenue growth in 2024 and 2025, so subsequent growth in the company's performance still lacks new growth momentum. Once the growth rate of the number of subscribers slows down, it will still have an obvious impact on the company's performance.

3. Improve full-year performance guidelines, but the decline in free cash flow raises concerns

Thanks to excellent cost control, the company's operating profit and net profit both achieved significant year-on-year growth of 42.47% and 44.35%, respectively. In addition, the company has also raised its performance guidelines for the whole year. Revenue is expected to increase by 14%-15% year-on-year in 2024, while the operating profit margin for the whole year is expected to be 26%.

Netflix still maintains a strong competitive advantage in the streaming media industry. Judging from the latest market share data, the company's ratings reached a record high of 8.4% this season, second only to YouTube. The two are in different segments, and the rest of the competitors are far behind.

Netflix still maintains a strong competitive advantage in the streaming media industry. This season, the company's ratings share reached a record high of 8.4%, second only to YouTube. However, in order to maintain its competitive advantage in content, Netflix must increase investment in series production and operation services, including planning offline physical entertainment stores, etc., which poses a challenge to the company's capital expenditure and cash flow.Free cash flow for the quarter fell 9.46% year-on-year due to increased content spending. Free cash flow is expected to remain at 6 billion US dollars for the whole year, lower than the market's forecast of 6.59 billion US dollars, causing market concerns.

Although Netflix spent 1.6 billion dollars to buy back 2.6 million shares this quarter, due to insufficient cash on the account, free cash flow is expected to continue to decline, and the company is unlikely to be able to carry out continuous repurchases, making shareholder returns difficult to support.

Figure: The company's free cash flow situation in 2019Q3-2024Q2 (unit: million)

Source: Company's official website

4. Netflix Stock Price Future Trend Analysis: Growth Momentum and Market Expectations

Netflix still has a strong competitive advantage in the streaming industry. It is expected that in FY2024, the number of paying users will continue to grow throughout the year, with the support of advertising packages and the crackdown on shared accounts, but the growth rate may slow down. Since advertising revenue is unlikely to achieve significant growth in the 2024 and 2025 fiscal years, the company cannot rely on an increase in the average monthly gross revenue (ARM) per paying user in the short term; it can only rely on an increase in the number of paying users. The growth momentum is relatively single.

(1) FY24 Revenue Expectations and Future Growth Prospects

Netflix's revenue growth rate is expected to be 14%-15% in FY2024, while the growth rate will gradually slow in FY2025 and 2026. Despite the company's continuous optimization of content costs and operating expenses, profit margins are expected to continue to rise. Earnings per share (EPS) are expected to grow by high double digits in FY2024, and may slow in FY25 and FY26. Therefore, the 2024 fiscal year will be the high point of the company's performance growth rate, and it will also be the time of highest growth. After the high growth rate is difficult to sustain, a more careful assessment of the company's long-term growth space is needed.

(2) Shareholder return and cash flow analysis

In terms of shareholder returns, it is expected that Netflix repurchases may be difficult to sustain due to the company facing large content costs, insufficient cash on account, and a year-on-year decline in free cash flow. The company's stock price growth is mainly dependent on rapid growth in performance.

(3) Overall outlook and investment suggestions

Overall, Netflix's performance growth momentum is single, and the high growth rate may be difficult to sustain. We need to wait for the company's advertising business to expand to drive new growth. Currently, the market's expectations for the company's full performance in 2024 are still very high. The company's valuation is reasonably high, and there is limited room for stock price growth in the short term.

Investors with original Netflix shares are advised to use Cover Call's investment strategy to guarantee profits and reduce losses; investors who do not hold original shares can wait for the stock price to recover and take the opportunity to get started.

Through the above analysis, we can better understand Netflix's performance in the streaming industry and its future share price potential. Both current shareholders and potential investors should make wise decisions based on their own investment strategies and risk appetite.

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