Netflix (NFLX) Streams Sharply Higher On Q3 Upside And A Return To Positive Net Adds

1:42 pm Wednesday, October 19th, 2022

Netflix (NFLX) is streaming sharply higher after reporting Q3 results last night. It beat handily on EPS, revenue and operating margin. The guidance for Q4 was below expectations, but much of that is due to significant FX headwinds. Netflix gets a lot of revenue from overseas and converting that back into US dollars (which has strengthened significantly) takes a chunk out of that. Also, Q4 is typically NFLX’s highest quarter for content and marketing spend, so we think investors are giving NFLX a pass on the guidance.

Besides the headline numbers, the other standout metric was global streaming paid net adds. Not only did it return to positive territory after three declines in Q1-Q3, but at +2.41 mln, it was more than double the +1.00 mln prior guidance. Also, the Q4 guidance at +4.50 mln was quite good. Unfortunately, Q4 will be the last time NFLX guides for net adds. In 2023, it wants investors to focus on broader metrics like revenue and profitability, especially as revenue diversifies with its ad-supported tiers.

A big reason for the strong net adds in Q3 was its content slate being especially strong. It kicked off the quarter with Stranger Things Season 4, NFLX’s biggest season of an English language series ever. This was followed in August by The Sandman, season five of fan favorite Cobra Kai and the Dahmer series, which has become its second largest English series.

The other big news is that we got an update on its ad-supported tier. It will launch in 12 markets in Q4, including the US on November 3. We like that NFLX is keeping it simple with one low-priced ad plan — Basic with Ads — at a 20%-40% discount from its current starting price. So in the US, for example, Netflix will now start at $6.99/mo (vs $9.99 today). The Basic with Ads plan will have ~5 minutes of ads per hour. The reaction from advertisers has been extremely positive.

The stock is booming today. We think that is because investors were just too negative on the name in recent months. People were overreacting to the negative net adds in recent quarters, thinking the sky was falling. As such, we think NFLX is right to stop providing net add guidance as there is too much focus on that metric. The stock reacts too much to it. The reality is that revenue and profits are the true measure of success, especially with NFLX making some big changes in 2023 with ads and cracking down on account sharing.