Big Tech Earnings Reviews: Netflix

Netflix (NASDAQ: NFLX) reported its latest earnings results. Here’s a recap of those earnings, some key takeaways, and the resulting shifts in analysts’ estimates, according to Visible Alpha consensus

Netflix Beats Expectations

Netflix beat expectations in a few key areas, leading to stock price outperformance since the earnings release. At Netflix, while Q3 was solid, the Q4 and FY 2025 guidance came in above consensus, driving the stock price up over 8% since the release.

Q3 performance: Netflix Inc. (NASDAQ: NFLX) reported Q3 2024 results on Thursday, October 17, 2024. Q3 revenue of $9.8 billion was slightly ahead of consensus estimates, driven by a 15% increase in average paid memberships year-over-year. The company reported 5.1 million new additions. The ads plan accounted for over 50% of sign-ups in ads’ countries.

The UCan market saw 16% year-over-year revenue growth, driven by increases in paid memberships and ARM. In addition, APAC and EMEA showed strong double-digit increases. Latam revenue was up 9%, but there were some questions around the lack of paid net additions. Netflix delivered a Q3 operating profit of $2.9 billion and a 29.6% operating profit margin, ahead of consensus estimates coming into the quarter.

Q4 2024 expectations: The company guided Q4 to 15% year-over-year growth with revenue expected to be above $10 billion, a bit above consensus. Revenues are expected to be supported by continued net additions and monetization. Offering a range of pricing and plans combined with continuing growth in the ads business is expected to further increase monetization. Operating margin is expected to be 22.0%, over 100 bps better than expectations of 20.9%.

FY 2025 expectations: The company expects to grow revenues to $43-44 billion by increasing engagement trends and reducing churn with a more diverse entertainment offering. Gaming and the growth of ads could be key drivers in 2025. According to consensus, analysts expect the company to generate a 28.3% margin from revenue of $43.8 billion and $12.4 billion in operating profit in FY 2025.

Netflix Consensus Revisions

Source: Visible Alpha consensus (October 21, 2024). Stock price data courtesy of FactSet. NFLX’s current stock price is as of the market close on October 18, 2024.

Netflix Ads Business

According to the company, in Q3, the Ads tier grew 35% quarter-on-quarter and accounts for 50% of new sign-ups and continues to scale. In the Q3 shareholder letter and earnings call, management highlighted that the Ad Tier enables lower prices and additional revenue and profit. The Company stated in the earnings call that they expect that ads revenue will roughly double year-over-year and that they are currently seeing a 150% increase in our ads sales commitments.

Netflix remains upbeat about the long-term opportunity, given the size of its user base. The company continues to work on advertising business features, both to scale and to build out the technical capabilities. In particular, the company called out that they are scaling faster than their ability to monetize the growing ad inventory. This is creating a short-term drag on ARM. The company is working to balance building ads scale and revenue growth.

Ad-supported revenue expectations: Currently, consensus projects total ad-supported revenue to expand to over $7.5 billion by the end of FY 2027, up 4x from FY 2024 of $1.8 billion. There is a significant range of views on the magnitude of this growth. For FY 2027, analyst estimates range from $2.8 billion to $16.2 billion.

Longer-term Outlook

Based on Visible Alpha consensus, the operating profit margin is expected to grow from 26.6% in FY 2024 to 32.1% in FY 2027. Currently, consensus estimates the operating margin to surpass 30% in FY 2026, and for this to exceed 32% by the end of FY 2027, which may be aggressive given the investment likely required to scale the ads business. There is significant debate among analysts with respect to FY 2027 margin estimates, which range from 29% to 34%. This margin growth is expected to take FY 2024 expected diluted EPS from $19.76/share to $35.07/share or 23x FY 2027 P/E and a consensus target price of $778.

Netflix Consensus Estimates

Source: Visible Alpha consensus (October 21, 2024)