Netflix Earnings Preview: The Growth of New Users is Optimistic

Netflix (NASDAQ: NFLX) is a world-leading online streaming platform founded in 1997. The company is known for providing high-quality video content and convenient subscription services. Since its establishment, Netflix has been committed to continuously innovating and improving its business model to meet the growing needs of users. Currently, Netflix has become one of the largest online video platforms in the world, with more than 200 million users.

However, with the intensification of market competition and changes in user requests, Netflix also faces some challenges. In recent quarters, Netflix's stock price has experienced a roller coaster and recovery, which has attracted widespread attention on the market. In this article, I will provide a forward-looking analysis of Netflix's second quarter 2023 earnings report, and discuss its future development trends and possible risk factors.

The growth point of the user subscription business lies in the number of new users, which has reversed its decline in recent quarters. After experiencing customer losses in the first half of 2022, Netflix has regained the favor of users in recent quarters, but the growth of users has been much weaker than in previous years. The number of new users in the first quarter of 2023 was 1.751 million, reversing the decline of negative user growth in the first quarter of 2022.

By observing the MAU situation in the first quarter, the MAU data basically has a positive correlation with the user growth data. Judging from the monthly active user statistics chart of Netflix APP in the first quarter, the monthly active user in the first quarter once showed signs of regression in February, and finally only achieved a slight increase in March, from 194 million at the beginning of the year to 202 million at the end of March, which is in line with the weak first quarter.

The number of monthly active users increased optimistically month-on-month, and the number of new users is expected to continue to pick up. In the second quarter, Netflix's monthly active users changed more optimistically, from 202 million at the end of March to 220 million at the end of May, which was better than the first quarter. It is expected that the number of new users will increase mainly due to the crackdown on shared accounts. At the same time, although the second quarter is the off-season for content, Netflix has also put some high-quality popular works on the shelves, such as Queen Charlotte, Black mirror, Bloodhounds, etc., all of which have exceeded 7 points in the IMDb website rating, and the number of clicks is relatively high. However, there is still a big gap between global hits such as "Stranger Things" and "Squid Game", and there is no significant difference from the distribution of views in the first quarter.

Since 2017, ARM has maintained a fluctuating upward trend. Thanks to its excellent content and leading position in streaming media, Netflix's several price increases in recent years have been accepted by users. Although there are some fluctuations in the middle, on the whole, Netflix's adjustment in membership prices still plays a great role in promoting the company's ARM.

Low-cost plans are taking a step back, and ARM is still expected to remain high. In November 2022, Netflix launched a new ad-supported package, which allows users to enjoy Netflix's services at a lower price while placing some advertisements. But this business has not dragged down Netflix's average subscriber revenue as feared. According to a market survey in May 2022, most users who subscribe to premium plans will not re-select cheaper packages with advertisements. I believe that the ad-free advantage further stimulates the user stickiness of the premium package, while giving more choices to price-sensitive users, and ARM is still expected to remain at a high level. Netflix's ARM is expected to remain between 11.5-11.7 in the second quarter of 2023.Figure 6: Survey statistics of existing users' willingness to change to low-cost packages in May 2023.

Netflix's implementation of the paid account sharing policy has been very effective. As of May, Netflix has implemented the paid account sharing policy in many countries and regions around the world. According to the company's disclosure, there are as many as 100 million shared accounts around the world, including 30 million users in the United States and Canada. The paid sharing policy may cause some user churn in the short term, but in the long run, it will help promote the conversion of free sharing accounts into new subscribers, and paid sharing will also help improve the company's monetization. From the data point of view, it actually increases the number of members willing to create separate accounts. According to Antenna data, after Netflix sent an email in late May reminding members not to share accounts with non-living users, Netflix ushered in the highest growth in new user registrations in the United States for four days, with two days of single-day registrations exceeding 100,000 people.

Pay attention to the progress of the advertising business. Since Netflix launched its ad-supported package in November 2022, it has successively launched advertisements to some countries and regions. Users will see 4 to 5 minutes of advertisements per hour, and the length of advertisements will vary from 15 to 30 seconds. Netflix once said that the demand for advertising revenue was greater than the supply, but so far it has not disclosed the detailed revenue of the advertising business. In this regard, Netflix's chief financial officer said in early 2023 that as the revenue of the advertising business matures, the business will account for at least 10% of its future total revenue. It is recommended to pay attention to the progress of the advertising business. The advertising business is expected to become the second growth curve for Netflix to further increase its revenue, and the high gross profit margin of the advertising business itself has the opportunity to bring higher net profit to Netflix.

Netflix's main operating costs come from its investment in film and television content. In order to reduce costs, Netflix has gradually reduced its investment in content production in recent quarters, investing only $2.81 billion in the first quarter of 2023. However, as a streaming platform that competes with content quality, Netflix must ensure sufficient content investment to find popular works that cause user growth. Therefore, I believe that Netflix's revenue costs will not shrink further in the second quarter, but rebound.Figure 6: Netflix's Content Investment Expenditure from Q3 2020 to Q1 2023.

Netflix's current mainstream competitors are Hulu, HBO Max, and PeacockTV. As of the first quarter of 2023, Netflix still has the largest market share, and its excellent content quality and established word-of-mouth guarantee his leading position in the market. But this figure is down 5.56 percentage points from Quarter 1's 49.72% market share in 2022, while Hulu and PeacockTV's market share in the first quarter of 2023 increased by 3.37% and 43.8% year-on-year, respectively. At present, Netflix's leading position is gradually being eroded by other platforms. Combined with the MAU user data in the second quarter, this situation should improve in the second quarter.Figure 7: Market Share of Overseas Streaming Media Platforms in the First Quarter of 2023.

To sum up, Netflix's second-quarter performance will have a steady improvement compared to the first quarter, but the magnitude will not be too large, mainly reflected in the gradual recovery of the number of monthly active users and the expected rebound in content spending costs.

Judging from the current stock price, the market valuation has fixed a lot after the negative growth of Netflix subscribers in 2022. Bloomberg's consensus expectation is that diluted EPS will be 2.84, down 11.11% year-on-year and down 1.39% month-on-month; total revenue will be 8.265 billion, up 3.70% year-on-year and up 1.27% month-on-month; net profit will be 1.282 billion, down 11.00% year-on-year and down 1.78% month-on-month.

I believe that Netflix's actual second-quarter results will be better than the current consensus expectations. The continued recovery in new subscribers and the maintenance of high ARM will bring the company higher revenue than market expectations, and the advancement of the advertising business is expected to further increase the growth of net profit. Although there is the possibility of improvement in content costs, I believe that the revenue growth in the second quarter is enough to cover this rebound.

However, combined with the stock price, I feel that the current stock price is already at a high level, and the room for continued rise in the future is limited, so I believe that the current investment value of Netflix is not high.

In terms of option strategy, since the company's performance expectations are relatively good, but the stock price has limited room to rise, you can consider selling a high-priced call to earn option gold.