Third-quarter revenue rose 11%, ignoring exchange rate impacts, to $12.9bn (as expected), driven by membership growth, pricing, and increased ad revenue.
Operating profit rose 37% to $4.5bn ($4.3bn expected), and margins improved 6.4 percentage points to 34.6%. The improvement was mainly due to the timing of expenses, whereas last year’s figure included a one-off Brazilian tax charge.
Free cash flow rose 8% to $2.9bn, and net debt ended the period at $6.9bn. Share buybacks totalled $4.8bn, with $22.3bn remaining on the current plan.
Looking at the fourth quarter, management expects revenue growth of 11%, to $13.4bn, with margins of 26%, including a hit from recent job cuts. For the full year, revenue is expected around $51.1bn, growing 12%, with operating profit growth of above 20%. Ad revenue is now expected to reach around $2.7bn, down from $3bn previously, becuse of slower rollout of some ad products.
The shares were down 6.1% in pre-market trading.
Our view
Netflix's third quarter did little to change the conversation. The numbers were solid, but a lower advertising target, a softer fourth-quarter outlook and no firm commitment to double-digit growth next year confirmed what the market had already started to price in: growth is slowing.
That's the reality of a maturing business. In the US, Netflix is already in most homes that want it, so growth relies more on price rises and advertising than on new members. Price increases have landed well, and churn improved in the quarter, but there's a limit to how often that lever can be pulled.
Competition is also tougher than ever. YouTube and short-form platforms are fighting for the same screen time, rival streamers have matured, and households are choosier about which subscriptions they keep. It's ironic that the business that disrupted traditional TV is now the one defending its turf. The word "legacy" has started to creep into the debate, and although that feels harsh, the perception alone could keep a lid on the valuation.
So far, the response has been to broaden the offering rather than change course. Live events, video podcasts, creators and partnerships like in France are sensible additions. Bringing more third-party content onto the platform could become a real opportunity. A new content chief brings fresh perspective, but any meaningful shift in strategy is likely to take years, not quarters.
Advertising is still the most obvious growth lever. Ad revenue should still grow about 80% this year, and the shortfall looks to be down to slower product rollouts rather than weak demand. There are plans to launch the ad tier in 15 new countries next year, which should help win over viewers who have been priced out of the full service.
Underneath, the financial engine is in good shape. Margins continue to expand, the business is highly cash generative, and buybacks have stepped up with the shares at lower levels. That gives Netflix plenty of flexibility.
All in, we think the expectation reset has run its course, with the shares now trading at around 18 times expected earnings, close to a ten-year low. Netflix is a maturing business, but it's still the clear market leader with unrivalled distribution. We're not expecting a shift in sentiment anytime soon, but we don’t think one is needed. Now that the bar is lower, steady profit growth and the potential for ongoing buybacks are enough to support a more positive view on the investment case.
The key risk is disruption, with short-form and creator-led content competing hard for viewing time. That's content that doesn't need a $20bn budget to make.
Environmental, social and governance (ESG) risk
The media industry’s ESG risk is relatively low. Product governance is the key risk driver, alongside business ethics, labour relations and data privacy & security.
According to Sustainalytics, Netflix’s management of material ESG issues is average.
Netflix has to comply with significant and often complex regulations and laws, across a very large number of different countries. The group has a global anti-corruption policy, but this is not publicly disclosed, making its effectiveness difficult to assess.
There are both internal and external audits on IP infringement risk, as well as its independent ethics hotline available for employees. Cybersecurity issues are addressed by the audit committee. But it’s unclear where there is any managerial or board-level responsibility for privacy management.
Netflix key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember that yields are variable and not a reliable indicator of future income. Keep in mind that 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 LSEG. 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.