Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Netflix - account sharing crackdown sees boost in subscribers

Netflix's second quarter revenue came in at $8.2bn, in-line with guidance.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Netflix's second quarter revenue came in at $8.2bn, in-line with guidance. The group added 5.89m net new subscribers, higher than previously thought, reflecting the impact of stopping password sharing in its core markets. Operating profit rose 15.8% to $1.8bn, this was also in-line with expectations.

Netflix also said it's cancelling its cheapest ad-free version, amid its introduction of different-priced tiers.

Average revenue per membership (ARM) fell 1%, ignoring the effect of exchange rates. This partly reflected a lack of price increases over the quarter.

The group had net debt of $13.2bn as at the end of June, which includes amounts owed for content creation. There was free cash flow of $1.3bn.

Looking ahead, Netflix expects revenue growth of 7% to $8.5bn in the third quarter and flat to slightly negative ARM.

The shares fell 6.7% in pre-market trading.

View the latest Netflix share price and how to deal

Our view

We had been concerned Netflix's account sharing crackdown would spark an exodus of subscribers. We're pleased to say that worry was unneeded. An enormous amount of people have chosen to become legitimate customers, giving Netflix the opportunity to spread its costs over a larger customer base.

Netflix's ability to reduce churn (customers flipflopping to rivals) is firmly rooted in its best-in-class original content. Audiences engage more with original content, and while it's expensive to make, it does keep eyeballs on screens in a bigger way. That's partly why Netflix spends about $17bn a year on content.

And keeping eyes glued to the Netflix app is front of mind in the inflationary environment, which is why the ad-supported tier was born. Initial progress seems positive, but we are realms away from knowing for sure if this venture is the cash cow it's been sold as. Netflix needs to squeeze as much juice as it can from different avenues, given a recent lack of price increases could suggest that inflation is starting to bite Netflix's ability to crank up its subscription price, as households look to trim their spending.

The group also has a market-leading international production and distribution network. Doing localised content right isn't easy and Netflix has an enviable footprint here. This is important because longer-term subscriber growth will need to come from emerging markets.

Looking nearer-term, Netflix faces challenges of the economic variety in its core markets like the US and UK. As people dial down spending in the wake of inflation, the risk from fever-pitch competition has increased. While cheaper plan options will help mitigate this, Netflix can't take its foot off the gas - there are plenty of rivals waiting in the wings to pounce on market share.

The balance sheet, although carrying a fair whack of debt, isn't in bad health. That said, investors shouldn't be holding their breath for shareholder returns any time soon. The priority now is investing in the business and content for growth.

Netflix is a market leader, and there are plenty of moving parts these days which could add up to longer-term growth. We also note the valuation isn't as unreasonable as it has been. In the short-term, the group's valuation is likely to fluctuate with the wider market mood music, which will depend on the performance of major western economies.

Netflix key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 20th July 2023