Netflix Surprises with Subscriber Growth and Improving Margin Outlook

Written by: Sophie Lund-Yates | Hargreaves Lansdown

  • Netflix added 9.3mn subscribers in the quarter, compared with 1.8mn last year, and much better than the 5mn expected 

  • Operating profit rose 54%, with operating margin expectations upgraded to 25% 

  • Ad membership rose 65%

  • The group expects net new subscribers to be lower next quarter 

Netflix’s subscriber growth has shot the lights out once more. This comes despite stiff competition from rivals and sticky inflationary pressures on consumers. The market isn’t overly impressed with progress, partly because of the high bar set by recently cautious tech investors. Netflix is benefiting from its cheaper ad-supported tier, which is helping to capture customers that would otherwise stay away from the platform because of financial concerns. The bigger question now will be how Netflix continues to keep churn to a minimum, when rivals catch up with their own cheaper plans. 

Streaming is a notoriously choppy market, and keeping hold of customer dollars is an uphill climb. One area Netflix has an edge is its original content slate, which is known to be an excellent retention tool when compared to repurposed shows and films. Netflix’s local language productions are also an area of exciting potential, and the existing distribution lines are well ahead of rivals, giving it a head start. Netflix has undoubtedly mastered the cocktail needed to please viewers. The group is ultimately making good progress on its pivot towards becoming a broad-based revenue growth business, rather than simply a subscriber growth company. Maintaining that will involve harnessing its treasure trove of customer data, which is another exciting string to Netflix’s bow.

The market hasn’t taken kindly to news Netflix will stop reporting quarterly membership numbers. This is a natural pivot as the group steps into its cash flow positive era. The plan was always to mushroom the customer base and then drive revenue gains from elsewhere, but now we’re at that inflection point, there will be nerves around what this means for Netflix’s label as a higher-octane growth stock. 

Growth trajectories are a little hard to map where Netflix is concerned. An excellent track record doesn’t mean the remaining yards are lined with gold, and making that the case will require a great deal of spending, levels of which may not be fully baked into expectations at the moment.

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