The leading streaming service had a strong Q2, led by 34% growth in its ad-tier service.
Netflix (NASDAQ:NFLX) stock was moving higher Friday after the streaming service delivered robust Q2 earnings and raised its revenue growth guidance for fiscal 2024.
Netflix posted revenue for the quarter of $9.6 billion, up 17% year-over-year, while net income climbed 44% to $2.15 billion, or $4.88 per share. Revenue and earnings results topped analysts’ estimates. However, profits were down from Q1 2024, when Netflix posted earnings per share of $5.10.
The company also raised its revenue growth guidance for fiscal 2024 to 14% to 15%, up from 13% to 15%.
Netflix stock rose about 5% at the opening bell on Friday to over $678 per share, but it dropped down to around $651 as the day wore on, still up roughly 1.5% for the day. Year-to-date, Netflix stock has gained 38.7%.
Ad-tier service sees 34% growth in subscribers
Netflix has experienced rapid growth in its cheaper ad-tier service. The service, just $6.99 per month for two streams, has largely replaced its basic, no-ad plan, which has been phased out in the UK and Canada, and will soon be phased out in the U.S. and France.
As a result, the ad-tier service grew by 34% in the quarter, compared to Q1.
“Ads fulfill two important strategic priorities for Netflix: first they enable us to offer lower prices to consumers; and second, they create an additional revenue and profit stream for the business,” company officials said in the letter to shareholders.
In just 18 months since the ad-tier launched, the service accounts for 45% of all new subscribers.
Overall, Netflix boosted its number of global paid subscribers to 278 million, up 3% from the previous quarter and 17% from Q2 of 2023. The spike in subscribers stems from several factors, explained CFO Spencer Neumann on the earnings call.
One is the crackdown on password sharing that went into effect last year. Another is the lower price point for the ad service, while the third is its strong content slate.
The biggest hits for the quarter include the live roast of former NFL player Tom Brady, Netflixʻs first live event; season three of Bridgerton, along with the series’ Baby Reindeer, Queen of Tears and The Great Indian Kapil Show. Further, the films, Under Paris, Atlas and Hit Man were also hits.
Outlook for Q3 and full year
In its guidance, Netflix expects revenue growth of 14% year over year in the third quarter.
However, the company expects paid net additions in Q3 to be lower than the third quarter of 2023, which was the first full quarter that the crackdown on passing sharing went into effect.
It also calls for 14% to 15% revenue growth for the full year, up from previous guidance of 13% to 15%.
It could be hard for Netflix to sustain the membership growth it has seen recently, now that the surge from the password-sharing changes have been in effect for a year. However, the cheaper price service will certainly help, while the ads will create another robust revenue stream.
Netflix has improved its efficiency as the operating margin jumped to 27.2% in the quarter, from 22.3% in Q2 2023, and it is forecasted to hit 28.1% at the end of the year. Also, free cash flow is projected to be $6 billion for the year — less than the $6.9 billion last year, but still a good number.
Analysts are bullish
Netflix earned several price target upgrades post-earnings, including BMO Capital, which raised it by $53 to $770 per share.
That seems a bit optimistic, but Netflix seems to have found its footing and should be a solid grower. It is also reasonably valued for a growth stock, so investors should put it on their radars.
