Earnings Report Preview | New Strategy Faces Key Test, Can Netflix Deliver a Satisfactory Q3 Performance?

According to the Zhongtong Finance APP, Netflix (NFLX.US) will announce its third-quarter earnings report after the US stock market closes on October 18th (Wednesday). It is expected that Netflix's revenue will increase by 7.7% YoY to $8.536 billion, and earnings per share will increase by 12.8% YoY to $3.50.

The company's main profitability indicator, operating profit margin, is expected to remain at around 22.0%, and operating profit is expected to increase by 19.8% YoY to $1.89 billion.

The third quarter is an important period for Netflix as it will be the first real test of its strategy. Netflix plans to boost performance by cracking down on password sharing, introducing new paid sharing options, and offering cheaper ad subscription packages. Netflix previously stated that over 100 million households worldwide use its service for free.

Netflix believes that cracking down on password sharing and introducing paid sharing options should drive accelerated revenue growth in the second half of 2023.

The impact of ad subscription packages may take more time to materialize. However, if Netflix wants to attract marketing funds in a competitive environment, it needs to quickly scale up and hope that future ad revenue will account for at least 10% of its total revenue. Ad subscription packages may not make a substantial contribution this year, but they are expected to provide new momentum in 2024.

Netflix prices differently for different consumer groups, ranging from $6.99 to $19.99 per household in the United States. This may cause fluctuations in average revenue per member in the short term, but management believes that in the medium to long term, this will ultimately prove beneficial.

Netflix has stopped providing user guidance and now focuses more on revenue, profit margin, and profit. Nevertheless, user numbers are still a closely watched indicator for measuring demand performance under its new strategy. Wall Street believes that the crackdown will drive accelerated user growth in the third quarter and expects further acceleration in the fourth quarter. It is estimated that Netflix will add 6.175 million paid users in the third quarter, reaching a historical high of 244.5 million.

Netflix is expected to accelerate its growth in the fourth quarter. Wall Street predicts that Netflix's fourth-quarter revenue will reach $8.8 billion, a YoY increase of 12%, with operating profit of $1.23 billion. Underperformance would mean that the company's new strategy is not progressing as quickly as hoped.

Netflix's stock price has risen 26% this year, outperforming other streaming stocks. This is because Netflix is not only the most popular platform but also the only profitable one.

The risk lies in the market's high expectations for Netflix's new strategy, especially in advertising. The advertising business has excited the market, but Netflix has repeatedly stated that this business takes time to build and may take several years. Cracking down on password sharing will be the main driving force for growth in the coming quarters, although it may be difficult to improve average revenue per member in the short term.

At the same time, Netflix still faces various unfavorable factors, including pressure on household budgets, intensified market competition, and the ongoing threat of Hollywood strikes affecting content production.Overall, Wall Street analysts believe that Netflix's new strategy will provide support for its valuation, with an average target price of $464.50, representing a roughly 25% increase from the current level.