Netflix Q2 new user additions double expectations, but next quarter revenue guidance is not optimistic, dropping 6% after hours | Financial Report News

On Thursday, July 18th, after the U.S. stock market closed, streaming giant Netflix announced positive second-quarter 2024 financial results. Subscribed packages with ads saw a 34% growth in users, with an EPS of $4.88, exceeding the market's expectation of $4.74. Revenue reached $9.56 billion, higher than analysts' expected $9.53 billion, but the stock price dropped by 6% in after-hours trading mainly due to lower-than-expected third-quarter revenue guidance.

At the same time, Netflix's second-quarter streaming user growth exceeded market expectations by nearly double, with a total of 277.65 million paid users compared to analysts' expected 273.78 million. The net increase in paid streaming users for the quarter was 8.05 million, surpassing analysts' expectation of 4.87 million. Among them, the net increase in paid users in the U.S. and Canada was 1.45 million, higher than the market's expectation of 1.19 million; the Asia-Pacific region saw a net increase of 2.83 million, surpassing the market's expectation of 1.25 million.

Netflix expects a 14%-15% revenue growth for the full year 2024, with analysts expecting 14.85%, while the company originally forecasted a growth of 13%-15%. The operating profit margin for the full year is projected to be 26%, with analysts expecting it to remain at 25%. The full-year free cash flow (FCF) expectation remains at around $6 billion, while analysts expect $6.59 billion. The third-quarter EPS is estimated to be $5.10, higher than analysts' expectation of $4.74. Revenue for the third quarter is forecasted to be $9.73 billion, lower than analysts' expectation of $9.83 billion. Over the next year, the company plans to refinance $1.8 billion in maturing debt.

As Netflix's stock price approaches its historical high in November 2021, Wall Street has high expectations for this financial report:

Revenue is expected to grow by 16% year-on-year to $9.53 billion, surpassing Netflix's official guidance of $9.49 billion, compared to $8.19 billion in the second quarter of 2023.

Operating profit is expected to increase by 33% year-on-year to $2.43 billion, with an operating profit margin slightly lower than the previous quarter's 28%;

EPS is expected to surge by 43% year-on-year to $4.74, exceeding Netflix's guidance of $4.68, compared to $3.29 in the same period last year.

Net new paid subscription users are expected to be 4.7 million, lower than the 5.9 million in the same period last year. In the fourth quarter of 2023, users exceeded expectations by 13.12 million, and in the first quarter of 2024, there was an increase of 9.3 million, almost doubling the expected growth.

Netflix currently forecasts a 13%-15% year-on-year revenue growth for 2024, slightly conservative compared to the market's expectation of 15%. Wall Street predicts an average annual revenue growth rate of 13% for the next three years

Wall Street also expects Netflix's EPS to increase by 53% from last year's $12.03 to $18.41 per share this year, and further increase by 21% to $22.29 by 2025.

Before the financial report was released, Netflix's stock price opened high and then fell on Thursday, rising 1.5% in early trading before closing down 0.7% to a near six-week low. In mid-November 2021, the stock had risen above $700 to reach a new high. This year, the stock has risen by over 32%, outperforming the S&P 500's nearly 17% increase during the same period.

What is the focus?

Morgan Stanley analyst Benjamin Swinburne stated that despite many positive factors already being reflected in Netflix's stock price, considering the significant growth opportunities in the future, the stock is still favored.

On one hand, investors appreciate Netflix's foray into sports content and live events. In May this year, the company announced that it had won the streaming rights for two NFL (National Football League) games on Christmas Day.

Netflix's advertising revenue potential continues to be highly regarded. In May, Netflix revealed that its lowest-priced subscription package with ads had garnered 40 million global monthly active users, a significant increase from 15 million users in November last year, adding 35 million users compared to the same period last year.

According to sources, since being introduced into the service in 2022, the advertising revenue growth rates in the third and fourth quarters of last year and the first quarter of this year were as high as 70%, 70%, and 65% respectively. Goldman Sachs estimates that advertising revenue could generate nearly $3 billion for Netflix by 2024.

In May, Netflix also stated that 40% of all new streaming users chose the $6.99 per month ad-supported package, and plans to launch an in-house advertising technology platform by the end of next year. However, Bank of America believes that substantial revenue contribution from advertising will only come in the following year.

How does Wall Street view it?

Many analysts raised Netflix's target price before the second-quarter report was released. Bank of America raised its target price from $700 to $740, "to reflect the continued momentum of the core business," bullish on "world-class brand, leading global user base, and innovative leadership position," and expects advertising revenue in 2025 and 2026 to "substantially increase (without fear of intense competition)."

Morgan Stanley also shares Bank of America's optimism about Netflix's significant scale advantages in the streaming field, stating that there are still huge opportunities in the future, such as Netflix's share of TV viewing time in more mature markets like North America being less than 10%. The company's strong free cash flow generation and robust balance sheet advantages contrast sharply with competitors who have significantly cut expenses:

"Our analysis of Netflix user engagement data continues to show its uniqueness, especially in the strength and depth of international content. Strong core execution, combating shared paid accounts, and the ad-supported package that helps penetrate more price-sensitive groups are driving it to achieve its highest net user additions in 2024."TD Cowen raised its target price to $775 and raised expectations for this year's subscription user growth, stating that Netflix continues to benefit from actions against shared paid accounts. Their survey shows that in the second quarter, 23% of surveyed consumers said they most frequently use Netflix to load video content on TV, ranking first, while YouTube under Google accounted for 15%, ranking second, and basic cable TV ranked third at 12%.

KeyBanc raised its target price to $735 and maintained a "overweight" rating, believing that recent price increases by streaming competitors and Netflix's continued low customer churn rate will support the company's ability to raise prices again in the coming quarters.

J.P. Morgan raised its target price to $750 billion, stating that Netflix's large scale, strong user engagement, and diverse content will make it the default choice for consumer TV, movies, and other long-form content, and will make greater progress in live sports events.

Although Wedbush Securities did not change its target price, it maintained a "neutral" rating, believing that the biggest benefit of the ad package is limiting user churn. Netflix continues to strengthen its position as the winner of the "streaming wars":

"Netflix has found the right model through global content creation, cost balancing, and improving profitability. We believe the company will continue to expand its profitability and generate more and more free cash flow.

Netflix has successfully established an almost insurmountable lead in the streaming wars, and we expect competitors to continue to struggle when trying to replicate Netflix's business model."

What to Watch for in the Future?

However, Citibank maintains a cautious "neutral" rating and a lower target price of $660. Morgan Stanley warns that it has been 18 months, but Netflix's significant advertising revenue potential has not been confirmed, and much effort is still needed to expand the advertising scale:

"In addition to competing with Google's YouTube and Amazon Prime Video for advertising clients, Netflix also competes with social media short videos for user time. Artificial intelligence tools may significantly lower the barriers to entry for producing high-quality, professional videos, bringing competitive risks."

Stock research firm MoffettNathanson raised its target price to $565 but maintained a "neutral" rating, acknowledging that Netflix has indeed made "significant progress" in combating shared paid accounts. The proportion of users accessing the platform through other people's family accounts has decreased from 15% a year ago when the crackdown began to 9% in the first quarter of this year, but future efforts will become increasingly challenging.

In addition to the trends of adding new subscription users and advertising revenue, the market will also focus on Netflix's plans to open two "Netflix Houses" in Pennsylvania and Texas in 2025, offering immersive experiences including "hot IP" merchandise, food, and experiences related to popular series such as "Bridgerton," "Stranger Things," and "Squid Game."In addition, some analysts pointed out that Netflix's price increase for its ad-free plan is aimed at attracting more users to use the ad-supported plan. Cancelling the cheapest ad-free plan in the UK and Canada is also expected to further drive the momentum of advertising. Netflix will stop reporting new subscriber data and ARPU (average revenue per user) metrics starting from 2025, which had raised concerns about long-term user growth trends:

"However, this also indicates that Netflix's focus will shift from subscriber growth to profit as a key metric."

Some analysts also believe that Netflix's investments in gaming, live streaming, and sports-related content may bring in good revenue growth, but could impact profits. Netflix is aggressively promoting cheaper ad-supported plans, combined with higher digital marketing costs, which could squeeze profit margins.

(Continuously updated)