Netflix wins – again

Netflix released its third-quarter results this week, which exceeded analyst expectations on revenue, earnings, and subscribers.

The share price jumped by up to 14% pre-market on the results, which breaks its steady decline over the last year.

Netflix faced serious headwinds over the last twelve months after its subscriber base showed declining growth.

In its 2022 Q1 earnings release, the company recorded a 200,000 subscriber loss. It was the first time in a decade that the movie-streaming service recorded a decrease in subscribers.

Analysts’ consensus was that Netflix would grow its subscriber base by 2.7 million users for the period, and the share price fell by 22% in a day following the disappointing results.

Investors remained hopeful that Netflix would recover its subscriber loss in the following quarter. However, the company disappointed again.

It recorded its second consecutive quarter of subscriber decline, with a more severe 970,000 subscribers lost.

Investors’ fears of declining growth were confirmed, and the share price fell by 35% on the news.

The severe punishment for missing subscriber expectations was partly because the share price had lofty growth baked into it.

Netflix had an average price-to-earnings (P/E) ratio of 120 times earnings over the past five years. The share price traded at a significant premium that accounted for the expected future growth.

The sudden decrease in subscriber numbers challenged the assumed growth rate of the company and caused a significant decrease in the valuation.

Netflix released its Q3 earnings in the past week and recorded a strong rebound.

The company recorded revenue for the quarter of $7.93 billion, higher than the expected $7.84 billion.

It also generated earnings per share of $3.10, higher than the consensus estimate of $2.13 per share.

Besides the strong earnings, there was one particular achievement that excited investors.

Netflix reported a significant increase of 2.41 million in its subscriber base, which may suggest the movie-streamer has returned to its growth trajectory.

After two consecutive quarters of subscriber decline, the large increase in subscribers was an unexpected surprise.

The growth crushed consensus estimates that the company would add only 1 million subscribers.

In pre-market trading, Netflix’s share price increased by up to 14%, indicating a strong positive reaction from investors.

The biggest increase in Netflix subscriber growth was seen in the Asia-Pacific region, contributing 59% to the 2.4 million total.

The lowest growth in subscribers was seen in the United States and Canada, contributing only 4% to the total subscriber growth.

To bolster growth further, Netflix will launch a new advertisement-supported plan at a lower price in November.

Netflix Internal Development Officer Greg Peters said Netflix believes the lower ad-supported entry point would attract new lower-income members, expanding its membership base.

He went further to explain that the company doesn’t expect existing members to switch their membership to the lower-cost option as their membership plans have proven to be quite sticky.

Peters said the initial response to using Netflix as an advertising platform has been positive, and the company has seen strong demand.

Netflix expects its Q4 revenue to reach $7.8 billion and doesn’t yet expect significant revenue inflow from its advertising segment.