Morningstar Key Indicators for Netflix Stock
What we thought about Netflix’s revenue
Netflix NFLX reported another quarter of impressive subscriber growth and revenue and profit growth. However, the full-year revenue outlook foreshadows a slowdown in the second half, and the company’s decision to stop regularly reporting subscriber numbers in 2025 means that annual subscriber growth will be larger than Netflix has experienced in the past. We believe this supports our belief that the market will be reset at a lower level in the future. Last 6 quarters. We see Netflix as a victim of its own success, as its stock price plummeted following the news. While its business continues to show tremendous strength, in our view it is unrealistic to maintain recent levels of success. Given the strong quarter, we raise our fair value estimate to $440 from $425, but still think the stock is a bit overvalued.
Netflix added 9.3 million net subscribers worldwide in the quarter, bringing its net additions to more than 37 million over the past year. A 16% increase in subscriber base over the period resulted in a 15% year-over-year increase in revenue despite a 3 percentage point currency headwind. Operating margin exceeded 28%, up 7 percentage points year over year and approximately 6 percentage points better than any quarter in 2023. However, while the second-quarter outlook suggests an acceleration in revenue growth, the full-year outlook is between 13% and 15%. Growth means a slowdown in the second half. Management has raised its full-year operating profit margin target by one point to 25%, which also means streamlining the second half of the year.
After adding 2.5 million subscribers in the U.S. and Canada during the quarter, Netflix now has more than 81 million UCAN subscribers. With household penetration approaching 60% and a widespread crackdown on password sharing in 2023 leaving little opportunity to convert non-paying users to paid users, UCAN additions will be down from recent levels. This is expected to decline significantly and the company will continue to rely on it. Pricing and advertising to maintain high sales growth in this region.
Although we believe UCAN has ample opportunity to increase average revenue per subscriber, we do not believe this will drive revenue growth as much as new subscriber acquisition. After increasing prices on some plans in late 2023, his average revenue per UCAN subscriber in the first quarter increased by nearly 7% year over year. Additionally, even though subscribers are already gravitating toward the ad-supported tier, the company has not yet reached the stage where it can fully monetize the ad inventory it creates in the ad-supported tier, meaning that advertising is not generating significant incremental revenue. It is also believed to bring about a source. Ad-supported subscriber numbers increased 65% quarter-over-quarter, at a similar pace to the previous two quarters, and included 40% of total new subscribers in markets offering ad-supported slots.
While subscriber growth was broad-based across all markets, average revenue growth per subscriber slowed outside of UCAN. Consolidated average revenue per subscriber in 2024 may not increase significantly due to weak local currencies, country mix, and continued efforts to find the right price point.
The strength in profit margins is mainly due to a decline in cost of goods sold, which is thought to be mainly due to the lingering effects of the Hollywood strike in the second half of 2023, which resulted in a significant halt to new content production. The company reiterated its intention to spend approximately $17 billion on content in 2024, including $3.7 billion in the first quarter. The further away you are from the strike, the higher your general gross profit margin should be. This is likely a major reason why margins shrink as the year progresses. Over the long term, we expect margins to continue to expand as we need to realize operating leverage on top-line growth, including continued content spending increases.
As usual, sports programs were a hot topic during financial results announcements. There has been speculation as to whether Netflix will make a production for the NBA rights, which expire after the 2024-25 basketball season. No one mentioned NBA rights directly, but we would be surprised if Netflix made a big move in that direction. Management has been less convinced in recent quarters to rule out the possibility of pursuing major sports, especially as it continues to inch toward live sports, including weekly WWE Raw matches starting in January. ing. But after hearing management say that profit growth remains key to any decision-making, Netflix doesn’t need to rely on “loss leaders” to drive its business. I was happy. We take this to mean that we are skeptical that spending huge amounts of cash for major sports rights will help its business, and we agree.
