Yahoo Finance Why Is Netflix (NFLX) Down 7.9% Since Last Earnings Report?
A month has gone by since the last earnings report for Netflix (NFLX). Shares have lost about 7.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Netflix due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Netflix Q2 Earnings Beat, Revenues Up Y/Y on User Gain
Netflix reported second-quarter 2023 earnings of $3.29 per share, which beat the Zacks Consensus Estimate by 16.25% and increased 2.8% year over year.
Revenues of $8.19 billion increased 2.7% year over year but lagged the consensus mark by 0.93%. On a foreign-exchange neutral basis, revenues grew 6% year over year.
The streaming giant gained 5.89 million paid subscribers globally, thanks to a crackdown on password-sharing and the introduction of paid sharing in more than 100 countries in May, which represents more than 80% of Netflix’s revenue base. The company lost 0.97 million paid subscribers in the year-ago quarter.
Netflix now expects revenue growth to accelerate in the second half of 2023, driven by the launch of paid sharing. However, it anticipates foreign-exchange neutral average revenues per membership (ARM) to be flat to slightly down year over year due to limited price increases over the past 12 months and immaterial revenues from advertising and paid-sharing.
ARM decreased 3% year over year on a reported basis and 1% on a foreign-exchange neutral basis in the second quarter. ARM declined due to a higher mix of membership growth from lower ARM countries and limited price increases over the past 12 months.
Netflix scrapped the basic ad-free plan for new and rejoining members in Canada and is doing the same for U.K. and U.S.-based subscribers.
At the end of the second quarter, the company had 238.39 million paid subscribers globally, up 8% year over year.
Although Netflix is suffering from growing competition from services provided by Amazon, Disney and Apple, it benefited from a strong content portfolio in the reported quarter.
Hit shows like The Night Agent, Beef, Queen Charlotte: A Bridgerton Story and Love is Blind S4 helped Netflix win subscribers. Noteworthy movies include Murder Mystery 2, The Mother and Extraction 2.
Netflix’s Segmental Revenue Details
The United States and Canada (“UCAN") reported revenues of $3.60 billion, which rose 1.7% year over year and accounted for 44% of total revenues. The figure missed our model estimate of $3.71 billion, primarily due to lower ARPU.
ARPU climbed 1% from the year-ago quarter on a foreign-exchange neutral basis.
The paid subscriber base for UCAN increased 3.1% from the year-ago quarter to 75.57 million. The company gained 1.17 million paid subscribers compared with the year-ago quarter’s loss of 1.3 million.
Europe, Middle East & Africa (“EMEA”) reported revenues of $2.56 billion, which increased 4.3% year over year and accounted for 31.3% of total revenues. The figure beat our model estimate of $2.51 billion. ARPU decreased 2.7% from the year-ago quarter on a foreign-exchange neutral basis.
The paid subscriber base for EMEA increased 9.4% from the year-ago quarter to 79.81 million. Netflix gained 2.43 million paid subscribers compared with the year-ago quarter’s net loss of 0.77 million.
Latin America’s (“LATAM”) revenues of $1.08 billion increased 4.6% year over year, contributing 13.2% of total revenues. The figure beat our model estimate of $1.07 billion.
ARPU declined 1% from the year-ago quarter on a foreign-exchange neutral basis.
The paid subscriber base for LATAM rose 7.2% from the year-ago quarter to 42.47 million. It gained 1.22 million paid subscribers in the reported quarter.
Asia Pacific’s (“APAC”) revenues of $919 million increased 1.2% year over year and accounted for 11.2% of total revenues. The figure missed our model estimate of $926.7 million, primarily due to lower ARPU.
ARPU decreased 7% year over year on a foreign-exchange neutral basis.
The paid subscriber base for APAC jumped 16.5% from the year-ago quarter to 40.55 million. The company added 1.07 million paid subscribers in the quarter, down 0.9% year over year.
Operating Details
Marketing expenses increased 9.1% year over year to $627.2 million. As a percentage of revenues, marketing expenses increased 40 basis points (bps) to 7.7%.
Operating income increased 15.8% year over year to $1.83 billion, beating Netflix’s guidance of $1.71 billion. Operating margin expanded 250 bps on a year-over-year basis to 22.3%.
Balance Sheet & Free Cash Flow
Netflix had $8.58 billion of cash and cash equivalents as of Jun 30, 2023 compared with $7.83 billion as of Mar 31, 2023.
Total debt was $14.47 billion as of Jun 30, 2023 compared with $14.44 billion as of Mar 31, 2023.
Streaming content obligations were $20.90 billion as of Jun 30, 2023 compared with $21.53 billion as of Mar 31, 2023.
Netflix reported a free cash flow of $1.34 billion compared with a free cash flow of $2.1 billion in the previous quarter.
Guidance
For the third quarter of 2023, Netflix forecasts earnings of $3.52 per share, indicating an almost 10% increase from the figure reported in the year-ago quarter.
Total revenues are anticipated to be $8.52 billion, suggesting growth of 7% year over year and also on a forex-neutral basis.
The quarterly operating margin is projected to be 22.2% compared with the 19.8% reported in the year-ago quarter.
For 2023, Netflix expects the operating margin to be in the 18-20% range. It expects to generate a free cash flow of at least $5 billion, higher than its previous guidance of $3.5 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
The consensus estimate has shifted 10.59% due to these changes.
VGM Scores
Currently, Netflix has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Netflix has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Netflix, Inc. (NFLX) : Free Stock Analysis Report
