Netflix (NASDAQ:NFLX) recently reported its Q3 earnings and the market reacted positively, with the stock rising over 16%. Here are the key takeaways from the report and thoughts on whether you should consider buying or selling Netflix stock following this post-earnings rally:
The Success of Ad-Supported Tier Strategy
One of the most significant takeaways is the success of Netflix’s ad-supported tier, introduced last year. The plan, priced at $6.99 in the U.S., saw a 70% increase in membership in Q3, following a 100% rise in Q2. On average, 30% of sign-ups in regions offering the ad-supported plan chose this option. This shows the attractiveness of this tier and the potential for growth.
Netflix’s Pricing Power
Netflix raised the prices of its Basic and Premium plans, demonstrating its pricing power in the face of heightened competition. The Basic plan increased by $2 to $11.99, and the Premium plan went up by $3 to $22.99. This move indicates that Netflix can leverage its pricing strategy effectively.
Growth Recovery Amid Password-Sharing Crackdown
After a few challenging quarters in 2022 where subscriber numbers declined, Netflix made a comeback in Q3 by adding 8.76 million net subscribers. This is the highest growth rate since Q2 2020, driven by increased demand during the global lockdowns. The company expects the net subscriber additions in Q4 to be similar to Q3, indicating a return to growth. The crackdown on password sharing has played a significant role in this turnaround.
Margin Expansion and Free Cash Flow
Netflix raised its 2023 operating margin forecast to 20%, at the upper end of its previous guidance. This implies an improvement of 200 basis points compared to the previous year, with further margin expansion expected in 2024. The company also increased its 2023 free cash flow guidance to $6.5 billion, albeit with some of it attributed to lower content spending due to industry strikes.
Gaming as a Growth Opportunity
Netflix views gaming as a substantial long-term growth driver, seeing it as a $140 billion market (excluding China and Russia). The company is ambitious about its gaming segment, with plans to significantly increase engagement over the next few years.
Analyst Reactions: Some analysts were pleasantly surprised by Netflix’s strong Q4 subscriber guidance and praised the bold pricing changes. However, others remain cautious about the stock’s valuation and competitive pressure in the streaming industry.
Buy or Sell Considerations
While Netflix delivered a robust Q3, the decision to buy or sell the stock should take into account a few factors. Netflix’s valuation is on the higher side, and it faces ongoing competition in the streaming industry. While the company has managed to rebound, it is essential to weigh the potential for future growth against the current stock price.
In summary, while Netflix’s performance is commendable, some investors might choose to remain on the sidelines due to high valuations and the competitive landscape in the streaming market. The decision to buy or sell should align with your investment strategy and risk tolerance.
Featured Image: Unsplash
Author Faith Yakubu 
