Shares of streaming giant Netflix (NASDAQ: NFLX) increased by 23.4% in the last week that ended on October 21. Despite the recent uptick in share prices, NFLX stock is down almost 60% from all-time highs, valuing the company at $128 billion by market cap.
Netflix recently announced its Q3 results and reported revenue of $7.926 billion with adjusted earnings of $3.10 per share. Comparatively, Wall Street forecast Netflix to report revenue of $7.84 billion and earnings of $2.13 per share in the September quarter.
Netflix ended Q3 with net additions of 2.4 million subscribers, allowing it to grow sales by 6% year-over-year. Its top-line expansion was propelled by a 5% increase in paid memberships and a 1% rise in average revenue per member. Comparatively, Netflix had an earlier forecast to add just one million subscribers in Q3.
The company explained, “After a challenging first half, we believe we're on a path to reaccelerate growth. The key is pleasing members. It's why we've always focused on winning the competition for viewing every day. When our series and movies excite our members, they tell their friends, and then more people watch, join and stay with us.”
Netflix estimates revenue of $7.77 billion and adjusted earnings of $0.36 per share, which is much lower than the consensus revenue and earnings forecast of $7.97 billion and $0.36 per share, respectively. It expects to add 4.5 million subscribers in Q4 and has attributed the possibility of a sequential revenue decline to a strong U.S. dollar.
Netflix noted, “Our paid net adds forecast assumes that we experience our usual seasonality as well as the impact of a strong content slate, counterbalanced by macroeconomic weakness which leads to less-than-normal visibility.”
Netflix is widening its ecosystem
As subscription growth for Netflix has decelerated in recent quarters, the company is looking at multiple avenues to drive revenue higher in the future. It recently launched an ad-supported subscription tier in certain regions, which should be a key revenue driver over the long term.
Netflix might also be exploring a cloud gaming offering, widening its ecosystem and diversifying its revenue base in the process.
The company emphasized it won't provide paid membership guidance going forward and will instead focus on revenue as its primary top-line metric heading into 2023.
Netflix has launched ad-supported subscriptions in 12 countries where the TV spending for advertisers is $140 billion, compared to the $300 billion size of the streaming industry. So, Netflix has expanded its addressable market by as much as 50%.
A look at NFLX stock price and valuation
Netflix is forecast to increase its revenue to $33.96 billion in 2023, up from $29.7 billion in 2021. We can see the company is expected to increase revenue at an annual rate of 7% in this period, which is much lower than its historical growth rates.
Over the years, Netflix has had to wrestle with rising competition from tech leaders such as Apple (NASDAQ: AAPL), Disney (NYSE: DIS), and Amazon (NASDAQ: AMZN). So, for Netflix to keep adding new subscribers, it will have to increase customer acquisition costs and create engaging content. Due to a higher cost structure, analysts expect Netflix to narrow its adjusted earnings per share to $10.49 per share in 2022, compared to $11.24 per share in 2021.
NFLX stock is priced at 28 times forward earnings and 4x forward sales, which is quite acceptable for a company growing at a steady pace. But due to its stellar run in recent months, NFLX stock is trading at a premium of 5%, given consensus price target estimates.
Related: Netflix: Subscriber Beat but Demand Visibility Wavers