After the US stock market on Thursday, April 18, the streaming giant$Netflix (NFLX.US)$An overall positive financial report for the first quarter of 2024 was announced. It added 9.33 million new paying users, which is nearly double what the market expected.

However, after the frisbee, it rose 3%, then rapidly declined, and is now down nearly 5%.

According to some analysts, this is due to the company's warning that “typical seasonal factors will cause the increase in users in the second quarter to be lower than in the first quarter,” which suggests that the positive trend in user growth will slow down, triggering a fall in stock prices after the market.

The company's record number of new users in the fourth quarter of last year made the market expect it to continue its positive momentum in 2024. Of the analysts covered by Netflix, 26 rated “buy,” 13 rated “hold,” and only 1 recommended “sell.”

However, Wall Street's average target price for the stock over the next 12 months is $598.98, which is about 2% lower than the current stock price. Netflix has hit a 52-week high for six consecutive months, but it is still 11% off its all-time high at the end of 2021.

Netflix's Q1 revenue increase of 15% is the best in two years. The profit margin is the highest in at least three years, and the number of new users doubled compared to expectations

Netflix's quarterly report overall was better than expected. Revenue for the quarter was US$9.37 billion, or up 15% year on year. EPS had earnings per share of US$5.28 or 83% year over year, net profit increased 79% to US$2.33 billion, operating profit increased 54% to US$2.6 billion, and operating margin increased 7 percentage points to 28% year over year, all far exceeding market expectations and the company's official guidelines.

Earlier, according to statistics from data provider LSEG, analysts expected Netflix's revenue in the first quarter of this year to be 9.27 billion US dollars, up 13.6% from 8.16 billion US dollars in the same period last year, and EPS per share may be 4.52 US dollars, a sharp jump of about 57% from 2.88 US dollars in the same period last year.

The above market expectations are slightly higher than Netflix's first-quarter revenue guidance of US$9.24 billion. The latter represents a 13.2% year-on-year increase, which will be the biggest increase in revenue in more than two years. Netflix also expects an operating margin of 26.2% for the quarter, the best in three years since the first quarter of 2021. The company expects net profit to increase 51% year over year to US$1.98 billion, and EPS to increase nearly 56% year over year to US$4.49.

Beginning in the first quarter of last year, Netflix no longer provides guidance on the growth of subscribers in the next quarter; instead, revenue growth is the main indicator for evaluating the company's overall development. However, Wall Street expects an increase of 4.84 million users in the first quarter of this year, almost three times the 1.75 million in the same period last year.

The actual quarterly report shows that the number of paid streaming users of Netflix increased by 9.33 million, bringing the number of paid members worldwide to 269.6 million, a year-on-year increase of 16% to a record high, and surpassed analysts' expectations of 264.5 million.

Among them, the number of paying users in North America, the largest market, increased by 2.53 million, far exceeding market expectations of 988,600. The number of users in the Asia-Pacific region increased by 2.16 million, and analysts expect an increase of 1.48 million.

According to the financial statement, at present, nearly 270 million households in more than 190 countries around the world have subscribed to Netflix. Based on the average population of more than 2 people per household, the number of viewers has already exceeded 500 million, ranking at the top of the list in the entertainment company industry.

The company also said that the number of members subscribing to the advertising package in the first quarter increased 65% month-on-month compared to the fourth quarter of last year, maintaining a continuous month-on-month increase of nearly 70% in the third and fourth quarters of last year.

Netflix expects revenue to increase by another 16% in the second quarter. Next year's quarterly report will no longer publish key indicators such as the number of quarterly members

In terms of financial data guidelines, Netflix expects revenue growth of 13% to 15% for the 2024 fiscal year, that is, maintaining a healthy double-digit growth rate, and raising the annual operating margin forecast to 25% based on the foreign exchange rate as of January 24, which is higher than the market forecast of 24%.

Netflix also kept its annual free cash flow forecast of about 6 billion US dollars, slightly lower than analysts' expectations of 6.49 billion US dollars, and also maintained the forecast of a maximum cash content expenditure of 17 billion US dollars in 2024.

The company expects EPS earnings of 4.68 US dollars per share for the second quarter, higher than analysts' expectations of 4.54 US dollars. It expects revenue of 9.49 billion US dollars to 9.51 billion US dollars for the second quarter, an increase of 16% over the previous year.

Furthermore, Netflix's net cash generated from operating activities in the first quarter was 2.2 billion US dollars, and free cash flow totaled 2.1 billion US dollars, all the same as the same period last year. During the reporting period, the company used cash on hand to repay $400 million in senior notes and used $2 billion to buy back 3.6 million shares. Total debt at the end of the quarter was $14 billion, and $7 billion in cash and cash equivalents. The company also expanded its revolving line of credit loans from $1 billion to $3 billion.

Netflix says its reporting rules for the number of paid members will be changed again. Starting with the 2025 quarterly report, it will stop reporting the number of quarterly members and the average income (ARM) brought by unit members, and add the annual revenue guide as a sub-item. However, it will be announced when the number of subscribers reaches key milestones:

“We use revenue and operating profit as key financial metrics, and engagement (i.e. time spent by users) as the best measure of customer satisfaction.

In the early days of the company, there was almost no revenue or profit, and membership growth is a strong indicator of our future potential. But now that we're generating very substantial profits and free cash flow and developing new revenue streams, such as advertising and additional membership features, membership numbers are only one component of the company's growth metrics.”

Why is it important? It may affect technology stocks and general market trends in the earnings season

Netflix was the first major US technology company to publish a quarterly report. Its performance and subsequent stock price performance can not only reveal and lead technology stock trends, but are also critical to the overall market trajectory. Some analysts say that if the stock is hit hard, it may mean that the stock market as a whole is overvalued and trigger a profit settlement.

At the time Netflix announced its earnings report, market sentiment was deteriorating at an accelerated pace. The NASDAQ index fell 4.6% from its all-time high in a week, mainly due to the March US inflation data exceeding expectations, which led to a sharp rise in treasury bond yields, causing a heavy blow to growing technology stocks.

The Motley Fool, a US stock research and investment website, points out that historically, investors tend to punish the positive profit results of companies when market sentiment worsens, thus adding uncertainty to the stock price prospects of large technology companies after financial reports.

What should I pay attention to? User growth, advertising, price increases, and live sports broadcasts

Competition in the streaming media sector is intense, with traditional giants such as Disney and Paramount Global, as well as up-and-coming players such as Amazon and Apple, competing vigorously for market share. As the world's largest streaming media platform, steady subscriber growth is still a key indicator of Netflix's earnings report.

Investors will also pay attention to whether the newly launched advertising business in November 2022 will begin to effectively improve the company's financial performance, and how measures to crack down on password sharing for paid accounts in major global markets will affect the number of users.

Supported by these two measures, Netflix's subscriber growth recovered significantly in 2023, following a sharp slowdown in 2022. The number of members of the advertising package has increased by about 70% month-on-month for several consecutive quarters. Although the company has not published specific figures, it recently stated that more than 23 million monthly active users around the world use the ad-inclusive plan.

The market is also awaiting news of the Netflix package price increase. At the Quarterly News conference call last year, Co-CEO Greg Peters hinted that package price increases were basically suspended last year due to a crackdown on password sharing for paid accounts, but “now that we have completed this task, we can go back to the previous standard price increase method. The testing results of price increases in the US, the UK, and France are better than the company's expectations.”

The field of live streaming entertainment may be a bright spot for future growth. At the beginning of this year, Netflix announced that it has obtained the exclusive media rights for the WWE flagship weekly broadcast program “Raw” of the American Professional Wrestling League within ten years from 2025. This is the first time it has entered the live sports streaming business, and it is required to pay about 500 million US dollars every year. Netflix also hosted a live tennis match in March and invited Tyson to a live boxing match in July.

What do you think of Wall Street?

Wall Street is generally betting that Netflix will maintain its upward momentum in 2024. Before the Q1 earnings report was released, mainstream investment banks such as Morgan Stanley, J.P. Morgan Chase, Barclays, UBS, Wedbush, Guggenheim, Macquarie, and TD Cowen all raised their target prices.

This is mainly due to the company's acquisition of up to 13.1 million new subscribers in the fourth quarter of last year, which means that the strategy to crack down on password sharing is driving more people to convert to paid members.

Macquarie called Netflix “still the undisputed leader in streaming TV,” and cracking down on password sharing and lower price ad-inclusive packages “has successfully re-accelerated the double growth in average revenue brought about by subscribers and corporate members.” Netflix previously estimated that around 100 million users around the world share passwords, which may bring more room for subscriber growth in 2024:

“Investors should pay attention to Netflix's average revenue per member because of its monetization capabilities and potential increase in subscription prices with advertising packages. The average monthly price of Netflix's mid-tier ad-free package in the US is $15.49, which is lower than competitors like Hulu. Moreover, its user base with advertising packages is growing, providing it with larger scale potential and pricing power in a generally improved advertising market.

Since January 2022, Netflix hasn't raised the price of the standard package (that is, the mid-tier ad-free package described above), and we believe Netflix's pricing power advantage over competitors will make the price increase imminent.”

UBS Securities also anticipates that Netflix will continue to account for a larger share of overall TV ratings, and that the average price based on hours spent is lower than that of competitors. This “strong pricing power” will enable it to raise subscription prices and accelerate revenue and profit growth this year. Coupled with the increase in revenue brought about by advertising and healthy user growth, Netflix's total revenue in 2024 may increase 15%, double the 7% growth rate last year.

According to UBS, Netflix “is a major beneficiary of structural changes in the media industry” as the goal of overall streaming media shifts from user growth to the profitability that traditional media companies focus on. New strategies to increase profits include increased subscription package prices, platform integration, video library management and subsequent asset write-offs, reduced content spending, and a renewed emphasis on content licensing and licensing:

“We raised Netflix's forecast for net new subscribers in 2024 from 18 million to 20 million to reflect the continued growth in subscribers, the upward trend in average revenue from unit members, and higher operating leverage.

Due to Netflix's successful implementation of a global program to crack down on password sharing for paid accounts, the net number of new subscribers in 2023 was 29.5 million, up from an average of 21 million per year from 2020 to 2022.

Although we expect the net growth rate of subscribers to slow down, we also believe Netflix still has significant room for growth as it continues to convert users into paid members and attract new users, so it raised its free cash flow forecast to 2027.”

Morgan Stanley believes that Netflix launched more “breakthrough original hit series” in the first quarter of this year than in the fourth quarter of last year, which will cause its user growth to exceed expectations and drive profit growth:

“The market may be underestimating the benefits Netflix receives from non-English content, the depth of viewing of thousands of movies, and the impact of Netflix's original titles and exclusive streaming rights on its platform.

These advantages give Netflix a structural and objective competitive advantage. Coupled with entering new businesses such as advertising, gaming, and live sports, all reinforce our optimistic view of the long-term growth of its business and return on capital.”

Furthermore, TD Cowen is optimistic about the dual driving forces behind Netflix, namely cracking down on the financial benefits of password sharing for paid accounts, and “strong potential business demand from a strong and increasingly global content sector.” Wedbush Securities also believes that advertising, games, and more licensed IPs allow Netflix to “manage content costs and maintain a leading position in content consumption among streaming peers.”

However, investment management company MoffettNathanson cautioned that the crackdown on password sharing may preempt the growth of Netflix users because it will not change the basic fact that there are fewer and fewer households in North America, the largest market that have not yet subscribed to Netflix. Piper Sandler, a brokerage firm that also maintains a “neutral” rating, is concerned that the market's expectations for Netflix user growth may be too high.

Other analysts say Netflix's investment in games, live streaming, and sports-related content may bring a good increase in revenue, but it will have an impact on profits. Netflix is vigorously promoting cheaper packages with advertising, which, combined with higher digital marketing expenses, may squeeze the profit side.

Editor/Somer