On Thursday, Netflix (NASDAQ:NFLX) will deliver its Q3 2024 earnings report ending September. Per Zacks Investment Research, the expected earnings per share forecast for the streaming platform is $5.09 EPS. Compared to the year-ago quarter’s $3.73 EPS, this would constitute a 34.6% increase.
Presently priced at $706.71, NFLX stock is up 51% year-to-date, neck and neck with Bitcoin‘s returns. Although NFLX volatility is expected as investors place their bets ahead of the earnings report, what is the long-term benefit of Netflix exposure?
In other words, if NFLX stock goes down, would this be an opportunity to buy the dip?
What is Netflix’s Business Model?
To understand why NFLX stock has been so attractive, it is best to compare it to its opposite—Tesla (NASDAQ:TSLA). Like all automakers, Tesla deals in raw materials and manufacturing, and it is severely constrained by supply chain logistics, factory run-up costs, and the availability of rare minerals and metals.
Financially, this incurs great initial capital expenditure while also demanding ever-greater investment in manufacturing to ramp up production and keep up with the competition. This is also the reason why Elon Musk is so focused on turning Tesla into a robotaxi company with the recently revealed Cybercab.
Such a move would significantly shift Tesla to a Netflix-like model that relies on recurring revenue instead of one-time car sales. But not quite. Because Netflix is a content distribution platform, its digital bits incur exceedingly low variable costs as subscriber numbers rise.
This subscription-based scaling dilutes Netflix’s fixed costs related to initial content production and licensing. Moreover, once the content is marketed and released, it will enhance the company’s content library, which boosts the appeal to subscribe.
In short, while Tesla relies on manufacturing efficiency (without robotaxi in play), Netflix relies on user growth. Because of this, even seemingly minor, incremental changes in Netflix’s financials are significant.
Netflix’s Financials and User Growth
Within a decade, from Q2 2014 to Q2 2024, Netflix increased its subscriber base from 48 million to 277.65, representing a 478% user growth. Not only did that greatly offset content production costs, but Netflix also increased its operating margin from 7.49% to 27.2%. In the last Q2 earnings report, the company stated it expects operating margin to increase to 28.1% for Q3.
For the full year 2024, Netflix expects operating margin increase from 25% to 26%, while its revenue growth forecast added another percentage point, from prior 13% – 15% to 14% – 15%. In Q2, the company reported $9.5 billion revenue, which is 16.8% YoY growth.
Total paid memberships increased by 16.5% YoY to 277.65 million. For the quarter, Netflix tracked the lowest level of free cash flow since Q2’ 23 at $1.2 billion. Nonetheless, having free cash flow consistently above $1 billion gives Netflix plenty of space to pay off debt and expand its content offerings.
Overall, Netflix generated $2.14 billion in net profits for Q2, which is 44% more than in the year-ago quarter.
Netflix’s Content Production and Competition
Ultimately, the company’s streamlined economy of scale relies on content. After all, entertainment is discretionary spending unlike utilities. Given its importance, Netflix puts out highly diversified shows that cover different themes and tastes.
During the first half of 2024, the most successful Netflix show by view count was Fool Me Once (107.5M). A close second was the Bridgerton series (91.9M), followed by Baby Reindeer (87.6M), The Gentlemen (75.9M) and Avatar The Last Airbender (71.1M).
Accounting for 6,807 titles in total, the engagement in this period led to 68.26 billion watch hours. It is fair to say that Netflix successfully maintains its go-to status as a streaming service. Case in point, Parrot Analytics report for Q2 2024 concluded that Netflix increased its on-platform demand share to 18.2%.
In contrast, Netflix’s biggest competitor, Amazon (NASDAQ:AMZN) Prime Video with 218 million users, had its on-platform demand share decreased to 11.4% on a quarterly basis. Disney+ also experienced contraction to 15.3% behind Amazon with 153.8 million paid subscriptions.
Ad-Tier to Boost Netflix Valuation Further
After years of not monetizing content with ads, Netflix launched its ad-supported tier in November 2022. In the US, this is the entry-level subscription with $6.99/per month cost vs the standard $15.49/month. For Q2, Netflix reported a 34% quarterly growth in this tier, accounting for 45% of new signups.
As YouTube started to inject ads in a more aggressive manner, all the while having loose rules on when monetization is terminated, this puts Netflix in an advantage. Now that users on the world’s largest video platform are accustomed to constant ad-injection, a transition to a lighter Netflix approach, for richer content offering, is easier.
Moving into 2025, Netflix is expected to launch its own ad platform, which will be first tested in Canada by the end of 2024.
Netflix’s Bottom Line
Netflix capitalized on becoming the go-to platform for accessible entertainment. By having the largest subscription base of all streaming services, it is easier for Netflix to keep up the momentum.
In contrast, other platforms are more likely to lose subscribers when their exclusive offering loses appeal. To cut this discretionary cost, consumers tend to revert to the default platform with the largest number of titles.
This is why Netflix’s forward price-to-earnings (P/E) ratio is relatively high at 31.85, but it is justified. Twelve months ahead, 42 analysts formed a $729.53 consensus as the average price target for NFLX stock. The top target is $900, while the bottom target is $545 per share.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
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