![]() This aspect of high retention means that subscribers are committed to the platform and support a long runway for future growth. What's more encouraging is that churn or cancel has been low, even following steps to cut down on paid sharing. is hardly a novelty, and the market can start looking beyond "subscriber growth" as the key indicator. What we like about Netflix is the sense that following more than a decade of pursuing a growth at-all-costs type strategy, the company is finally bearing the fruits of its global scale with accelerating profitability.Īt this point, the streaming service in developed markets like the U.S. Overall, solid fundamentals in our opinion. The company ended the quarter with approximately $7.9 billion in cash and cash equivalents against $14.3 billion in financial debt. The flexibility ties into Netflix's solid balance sheet with a net leverage ratio under 1x. In Q3, Netflix bought back $2.5 billion in stock, with the board of directors increasing the existing authorization by $10 billion in September. The other side of that discussion connects to the stock repurchasing policy where Netflix has committed to returning cash above the minimum requirement. The implication here is for free cash flow to see some "lumpiness" over the next several quarters, but Netflix still expects to deliver "very substantial positive free cash flow in 2024". Nevertheless, the full-year 2023 free cash flow guidance by management at $6.5 billion is still running $500 million above prior forecasts even including the industry strike impact which has since been resolved. ![]() A portion of that has been based on lower-than-expected cash spending based on the impact of the headline-making WGA and SAG-AFTRA industry strikes that pushed back the production of content. Maybe the biggest surprise over the past year has been the climb in free cash flow, reaching $1.9 billion in Q3. Management is now guiding for a full-year operating margin of around 20%, at the top end of a prior target between 18%-20% ![]() Notably, marketing expenses as a percentage of revenue at 6.5% this past quarter is down from 7.2% last year reflecting some efficiency measures and cost rationalization. ![]() Still, the trends were good enough to push the operating margin to 22.4%, the highest level in two years. Stronger growth from emerging markets countries with lower average pricing has also added to the volatility in this metric. The context here considers the shifting mix with the lower price ad plans, as well as limited regular price hikes over the past year. Management is pointing to the adoption of the discounted ad-supported plans which are capturing 30% of new signups, outperforming internal expectations.Īt the same time, the average revenue per membership user globally was down by -1% y/y. The 2 million subscriber gain in the core United States, Canada, and Australia (UCAN) region compares to a gain of just 0.1 million in Q3 2022. Within this amount, the (EMEA) region was the growth driver adding 4 million subscribers in the quarter. Global streaming paid memberships increased 11%, reaching 247.15 million, adding 8.8 million in the quarter, the strongest gain since Q2 2020 at the peak of the pandemic boom. Revenue of $8.5 billion climbed by 7.8% y/y. Netflix reported its Q3 earnings in October with EPS of $3.73 coming in $0.23 ahead of the consensus. Ultimately, Netflix is a high-quality category leader that justifies a premium valuation and we rate shares as a buy. Several operating and financial tailwinds support a continuation of the current rally and we see an upside to current earnings estimates. We've been impressed by the turnaround and see a path for NFLX to reclaim its all-time high by next year. A lot has changed, and it's time for an update. For what it's worth, the stock is still down from that bearish call. We last covered NFLX back in 2020 with an article alluding to what may have been some pandemic-era hype. Furthermore, a rebound in subscriber growth including success with the new ad-supported plan helps explain the current strength in the stock. Newfound earnings momentum with sharply higher margins and climbing free cash flow is the plot twist. ( NASDAQ: NFLX) has been a big winner this year with shares up 65%, skipping ahead of the disastrous 2022 episode when the stock lost more than half its value. Matt Winkelmeyer/Getty Images Entertainment
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