After exceeding third-quarter profit projections by 46% with earnings of $3.10 per share, Netflix stock (NASDAQ:NFLX) have had a good surge. Sales were $7.9 billion, up 6% from the previous year, just above forecasts for revenue. Netflix saw subscriber growth despite missing both its top and bottom line targets.
Subscriber Expansion
In the third quarter, Netflix added 2.41 million customers. Investors were thrilled by the fact that the anticipated 1.09 million customers were more than doubled. With 1.43 million new customers, the Asia-Pacific region of Netflix had the most increase.
After the firm saw declining subscriber growth for two consecutive quarters, Wall Street needed to see subscriber growth. Despite exceeding profits estimates, this led to a significant decline in the price of NFLX shares early in the year. The company’s first fall in paying consumers in more than a decade occurred in Q1 with the loss of 200,000 members. The second quarter of this year saw a further loss of about 1 million members.
Notably, Netflix announced that its most recent Q3 release will be the final one in which the business provided guidance for its premium members. However, subscriber information will be made available when the business releases its quarterly earnings.
In its final projection, Netflix stated that it will attract 4.5 million customers in the fourth quarter. The corporation declared that moving ahead, revenue growth will take precedence over subscriber guidance and data as its key focus and goal.
Revenue Increase and Netflix Stock
A 5% increase in average paid memberships and a 1% increase in average revenue per membership were the main drivers of Netflix’s Q3 income (ARM). Additionally, the business recently disclosed the introduction of its paid advertising memberships tier, which will start at a monthly price of $6.99. Its average paid memberships and ARMs may increase as a result. So far, 12 countries have adopted Netflix’s ad-supported service.
It is anticipated that Netflix will eventually earn billions of dollars from the addition of advertising income. According to Netflix’s projection, Q4 revenue would be $7.8 billion, with the company expecting 4.5 million paid net additions and 6% year-over-year ARM growth. Despite being upbeat about the new advertising business, Netflix doesn’t anticipate a significant contribution in the fourth quarter because the strategy is to gradually increase plan membership.
Although the introduction of subscription-based advertising won’t have a significant impact on Q4 revenue, it should eventually place the business in a fantastic position to continue expanding and compete for higher ad income with major internet firms like Alphabet GOOGL. All of Alphabet’s revenue comes from the YouTube ad program. For reference, consider that in Q4 2021, Alphabet’s YouTube ad revenues were $8.63 billion, which was more than Netflix’s entire quarterly income.
Performing and valuing
Following the announcement of its strong Q3 earnings, NFLX is up almost 7%. Shares of NFLX are still down -59% year-over-year, underperforming the S&P 500’s -20% gain. NFLX, however, has risen an impressive +2,591% during the past ten years.
Following the surge, NFLX’s P/E has increased to 27.2X. This is quite close to the median of 25.9X and far below its 65.1X high during the previous year. Better yet, NFLX continues to trade at a relatively affordable level as compared to its decade-high of 2,640X and the median of 111.9X. Additionally, given that Wall Street has traditionally been willing to pay a substantial premium for NFLX, its present value is comparable to that of the larger market. With its days of revenue growth of 20% or more presumably behind it, Netflix is beginning to trade more like the mature tech firm that it is.
Final Verdict
The firm should continue expanding, but at a slower rate than in the past, according to Netflix’s final subscriber forecast. Additionally, the launch of its premium ad subscription program might generate billions in extra income in the future.
Right now, it appears that Netflix will also experience quick growth. The current forecast for NFLX profits shows a -10% year-over-year decline in 2022 but an 8% increase in FY23 to $10.94 per share. Sales are anticipated to increase top line by 6% in FY22 and another 7% in FY23 to $33.90 billion.
With their FY23 projection proving that the firm is really rising again, NFLX now holds a Zacks Rank #2 (Buy). Within the top 35% of more than 250 Zacks Industries, the Broadcast Radio and Televisions Industry at Netflix is also ranked.
Featured Image – Megapixl © Twindesign
Author Valerie Remorosa 
