Stock Story -
What Happened: Shares of streaming video giant Netflix (NASDAQ: NASDAQ:NFLX) fell 8.2% in the morning session after the company reported first-quarter results and provided underwhelming revenue guidance with full-year sales outlook implying 13-15% growth. This represents a deceleration compared to the expectations for 15-16% growth early in 2024.
Also, in a surprising move, the company announced it will stop reporting subscriber count starting in the first quarter of 2025 given the recent trends to its business model, which include "new pricing and plans with multiple tiers, different price points across different countries."
Co-CEO Greg Peters further explained the reason for the change, adding, "...So each incremental member has a different business impact. And all of that means that historical simple math that we all did, number of members times the monthly price is increasingly less accurate in capturing the state of the business."
On the other hand, Netflix beat analysts' estimates for nearly every metric we track: paid subscribers, revenue, operating income, EPS, and free cash flow. It raised its operating profitability expectations as this quarter's margin expanded seven percentage points year on year, reaching 28%.
A key thing to watch for Netflix in the coming quarters is its new ad-supported membership tier, where ad-supported members grew 65% from Q4 2023. Furthermore, over 40% of new signups came from this plan. This performance is certainly evidence its strategy is working.
Overall, this was a mixed quarter for Netflix. The market was likely pricing in loftier revenue numbers.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Netflix? Find out by reading the original article on StockStory.
What is the market telling us: Netflix's shares are quite volatile and over the last year have had 7 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 6 months ago, when the stock gained 10% on the news that company reported its Q3 2023 earnings. It was a strong quarter, with Netflix posting net streaming additions (essentially its paying subscribers) that beat expectations across all geographies (8.8 million net adds versus Wall Street estimates of 6.0 million). This increase was driven by new releases like One Piece and the continuation of existing hits such as The Witcher. There is probably some extra enthusiasm around this quarter's higher-than-expected numbers since Netflix rolled out paid sharing earlier this summer, which made investors skittish about whether subscribers would leave.
On the other hand, its Q4 revenue guidance was below expectations, but the company bullishly raised its full-year outlook for both operating margin and free cash flow. Netflix also bought back $2.5 billion of its shares outstanding this quarter, well above the $1+ billion in buybacks for the first six months. With a fresh new buyback authorization and a higher free cash flow outlook, repurchase activity could remain strong (a tailwind to the company's stock price).
Overall, the results weren't perfect but still quite strong, especially amid fears about what the paid sharing development could do to churn. Given the speed at which sentiment has shifted bearish this year, we are not overly surprised by the market's positive reaction.
Netflix is up 19.2% since the beginning of the year, but at $559.53 per share it is still trading 12% below its 52-week high of $636.18 from April 2024. Investors who bought $1,000 worth of Netflix's shares 5 years ago would now be looking at an investment worth $1,480.