Netflix Still Has a Long Runway of Growth Ahead of It

By Brian Nelson, CFA

On July 18, Netflix (NFLX) reported strong second quarter results that showed revenue on a foreign exchange neutral basis increasing 22% thanks to a 16% increase in average paid memberships and a 5% increase in average revenue per member [ARM] on a foreign exchange neutral basis. Global revenue was modestly higher than the company’s beginning-of-quarter guidance thanks to strength in global streaming paid net additions.

Netflix’s operating income surged in the quarter, up 42% from the same period a year ago, as its operating margin improved 5 percentage points to 27.2%, both “slightly above (its) guidance forecast due to higher-than-expected revenue.” Second quarter earnings per share came in at $4.88, up 48% on a year-over-year basis, inclusive of a $43 million unrealized gain on its Euro denominated debt.

The 8.05 million global streaming paid additions in the quarter speaks to continued growth potential at Netflix. The company has 8.4% share of U.S. TV time landscape and believes its “biggest opportunity is winning a larger share of the 80% of TV time that neither it nor Alphabet’s (GOOG) (GOOGL) Youtube has today.” Netflix accounts for just ~6% of its $600 billion addressable market across streaming, pay TV, film, games and branded advertising.

Netflix’s outlook remains strong. The company expects third-quarter revenue growth of ~14% on a year-over-year basis, which reflects 19% top-line expansion on a foreign exchange neutral basis. In the current quarter, its operating margin is targeted at 28.1%, while diluted earnings per share is expected to be $5.10. Netflix also raised its guidance for the full year 2024, now expecting revenue growth of 14%-15% versus 13%-15% previously and its operating margin to be 26% versus its prior estimate of 25%.

Netflix’s advertising business continues to build momentum:

Ads fulfill two important strategic priorities for Netflix: first they enable us to offer lower prices to consumers; and second, they create an additional revenue and profit stream for the business. Just over 18 months since launch, we continue to scale our ads tier, which now accounts for over 45% of all signups in our ads markets. Its attractiveness ($6.99 a month in the US, with two streams, high definition and downloads) — coupled with the phasing out of our Basic plan in the UK and Canada, which we will now start in the US and France — has increased our ads member base by 34% sequentially in Q2…

Given this sustained progress, we believe that we’re on track to achieve critical ad subscriber scale for advertisers in our ad countries in 2025, creating a strong base from which we can further increase our ad membership in 2026 and beyond. Our ad revenue is growing nicely and is becoming a more meaningful contributor to our business.

ESG Matters 

Image Source: Netflix

Netflix recently published an updated ESG report. On the Environment front, the company has set targets to reduce emissions by roughly half by 2030 as it works to modernize its production operations. More and more, its titles have “incorporated sustainability in their themes, storylines, characters, dialogue or visuals.” Regarding Social, “women continue to have the highest gender representation at Netflix, and over 50% of (its) US employees are from one or more historically underrepresented ethnic and/or racial backgrounds.” With respect to Governance, “at the end of 2023, women made up 40% of (its) independent directors and 31% of (its) overall board.” The company also adopted a Human Rights Statement “that sets forth (its) ongoing commitment to respecting internationally recognized human rights,” while it updated its Code of Ethics.

Concluding Thoughts 

All told, Netflix reported solid second quarter results and raised its forward-looking guidance for the full year 2024. The company is winning the streaming wars and has a long runway of future membership growth given the 80% of TV time it and Youtube don’t already own. Its nascent ads business continues to gain traction, too. Netflix still expects to haul in free cash flow of $6 billion in 2024, as it continues to buy back stock. The company ended the quarter with $14 billion in gross debt versus cash and cash equivalents of $6.7 billion. We think Netflix is performing well, but we’re already quite tech heavy in the newsletter portfolios and won’t be adding shares to any portfolio at this time.