Netflix Stock (NASDAQ:NFLX)
The management team of streaming behemoth Netflix, Inc. (NASDAQ:NFLX) is set to announce financial results for the second quarter of the company’s fiscal year 2023 after the market closes on July 19th. Quarterly results are vital to monitor for every organization in any year. After all, it is frequently during these times that major fundamental changes are disclosed, causing the perceived value of companies to move significantly. However, this quarter, more than any other, should be very interesting. Management has been working on a few projects to increase sales and earnings.
Furthermore, the streaming market is being viewed negatively due to the potential of oversaturation by the various streaming services that are available. Given all that is happening, I believe Netflix will produce some encouraging financial statistics for the quarter. However, in my opinion, this does not make Netflix stock an appealing acquisition at this time.
Keep an Eye on the Headlines
The headline news items will be the first thing investors look for when management publishes financial results for the second quarter of the fiscal year 2023. This will primarily focus on revenue, earnings, and subscription numbers. At the moment, management anticipates sales of $8.24 billion. If this occurs, it would represent a 3.4% rise over the $7.97 billion reported during the second quarter of the company’s fiscal year 2023. Analysts have a similar upbeat forecast. The only difference is that they anticipate even more revenue of $8.27 billion.
In the end, the picture isn’t quite as bright. The current management projection is that earnings per share will be around $2.84. This would be a decrease from the $3.20 per share recorded in the same period last year. Meanwhile, analysts predict earnings per share of $2.83. Matching management’s forecasts would result in $1.28 billion in earnings for the company while matching analysts’ expectations would result in a number that rounds out to the same amount. In comparison, the corporation earned $1.44 billion in earnings during the second quarter of the fiscal year 2022.
There are, of course, other profitability criteria that investors should be aware of. Analysts have remained mute on these metrics, and management has done the same. To put things in perspective, the operating cash flow in the second quarter of 2022 was only $102.8 million. Adjusting for increases in working capital, that figure more than doubles to $225.5 million. Meanwhile, EBITDA was $1.81 billion, a significant increase. This mismatch between cash flow data and the other two profitability criteria is due to how the company handles its accounts. Mind you, the corporation does nothing wrong. Rather, it deducts from operational cash flow the additions made to its content assets, followed by the amortization of content assets. If we account for this, the adjusted operating cash flow for the second quarter of last year would be $1.65 billion.
The amount of paying members on the company’s platform is the final key item that investors will be looking at. The corporation had 232.5 million members worldwide at the end of the most recent quarter. This is an increase from 221.6 million at the end of the first quarter of 2022. The great majority of the enterprise’s growth in the most recent quarter available, as well as many prior quarters, involves its operations in the Asia/Pacific area. In a single quarter, the company added 1.46 million paying subscribers from this region on its platform. In comparison, the Latin American region lost 450,000 people. The corporation gained 644,000 new employees across the EMEA (Europe, Middle East, and Africa) areas. And it added only 102,000 people in its most developed region, the United States and Canada.
It is critical to consider where the organization adds clients. This is largely due to the fact that not every customer is created equal. In the United States and Canada, for example, the average revenue per user in the first quarter of 2023 was $16.18 per month. The Asia/Pacific area contributed the least, at $8.03. What’s particularly concerning is that, with the exception of the most recent quarter, the company has suffered a fall in its average revenue per user in every quarter since the second quarter of 2022 throughout the Asia/Pacific area in which it is fast developing. Of course, this is not a new phenomenon. With the exception of Latin America, the corporation has seen declines as it strives for a bigger consumer base. If this pattern continues, investors can expect revenue growth to be driven mostly by new users, with part of that growth offset by a further fall in average revenue per user in most sectors.
Keep an Eye Out for Latest Efforts
Aside from the fundamental data that I have already addressed, there are a few more items that investors should be aware of. Most importantly, we should acquire more information about the company’s recent decision to monetize users who had previously shared their memberships. Management started paid sharing in Canada, New Zealand, Spain, and Portugal during the first quarter of this year. Netflix now offers four subscription options (at least in the United States). The most affordable option, termed basic with advertisements, costs $6.99 per month. It also offers a $ 9.99-a-month basic subscription, a $15.49 standard subscription, and a $19.99 premium subscription. Any subscriber who pays for the regular or premium services has the option of adding additional paid users as part of the paid sharing program for a monthly fee of $7.99 per person.
On a worldwide basis, fixing the sharing issue could be beneficial to businesses. Management estimates that they have missed out on roughly 100 million households as a result of this. There isn’t much information available yet about the first four countries where the company expanded paid sharing. However, they did state that they first witnessed a decrease in the number of overall subscribers in Canada. Nonetheless, by the second quarter of this year, Canada’s entire user base had grown to be larger than before they cracked down on free sharing. Given the parallels between Canada and the United States, the hope is that a similar experience will be experienced here at home.
Aside from this, another project involves the company’s advertising efforts. Management stated that during the first quarter of 2023, it was able to achieve 95% content parity across the globe between the sort of content on its platform for advertising-related subscriptions and those that do not entail advertising. In the United States, programs with cheaper pricing in exchange for the opportunity to display advertisements produced more money per month than the company’s basic plan. This suggests that their gamble on certain consumers selecting savings over an ad-free experience was true.
To expand its advertising prospects, the company created a programmatic private marketplace during the first quarter, allowing its advertising partners to control their ad inventory. The company has used Microsoft’s (NASDAQ:MSFT) sales platform and collaborated with other companies to validate campaign engagements. Another advantage is the opportunity for its advertising partners to improve the quality of the video on which their commercials play. It’s uncertain how big of an impact this will have on the company in the long run. However, investors should pay particular attention to management’s statements as well as any new facts on this topic.
Bottom Line
At present, Netflix, Inc. appears to be in for an exciting quarter. With the company’s paid sharing, advertising activities, and other initiatives, I wouldn’t be shocked if its financial performance was rather strong. However, the bottom line will be more dubious. While revenue growth will almost probably be enticing, bottom-line earnings will almost certainly be lower than last year.
This isn’t just my opinion. Both management and analysts believe this. In the long run, I believe the company will be fine on its own. To be honest, I don’t think Netflix, Inc. is the best player in the streaming industry. That label, in my opinion, belongs to The Walt Disney Company (NYSE:DIS). However, for those looking for a pure play in this market, Netflix stock is far from the worst option.
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