Netflix tops Wall Street’s lofty estimates, raises forecast

by Lucas Shaw

While rival media companies are unloading assets and cutting costs, Netflix Inc. continues to thrive.

The owner of the world’s most popular paid streaming service on Thursday reported second-quarter results that exceeded investor expectations in every major metric, saying revenue grew to $11.1 billion and earnings jumped to $7.19 a share. The company also raised its forecast for full-year sales and profit margins.

The second quarter is historically slow for Netflix, which typically adds more customers at the beginning and end of the year. But the company released a steady slate of popular shows, including two of the most-watched titles of the year — the third season of Ginny & Georgia and the final season of Squid Game. The company also benefited from a weaker dollar. More than two-thirds of its customers live outside the US.

Shares of Netflix were down about 2%. The stock has nearly doubled over the past year and the company’s market value tops $500 billion. That makes Netflix worth more than Walt Disney Co., Comcast Corp. and Warner Bros. Discovery Inc. combined.

The extent of the beat on the bottom line — less than 2% above expectations — may have fallen short of the most bullish expectations. “There may be some inbuilt expectations of a bumper earnings ahead of today, especially with regards to its live events,” said Kok Hoong Wong, head of institutional equities sales trading at Maybank Securities in Singapore.“And so we are seeing a little profit-taking post the announcement.”

While investors used to judge Netflix by the number of subscribers it added in any given quarter, the company has stopped disclosing how many customers pay for its service, directing them to focus on more traditional metrics such as sales and profit.

In its statement Thursday, Netflix said its 16% gain in revenue reflected member growth, higher subscription prices and an increase in advertising revenue.

Netflix expects to generate up to $45.2 billion in sales this year and says its operating margin is now forecast to hit 29.5%. Net income is on track to exceed $10 billion for the first time, thanks to exchange rates that will boost sales and a strong slate of programs. The second-half schedule includes new seasons of the hit shows Stranger Things and Wednesday, as well as movies such as Happy Gilmore 2.

The streaming leader faces more competition for its customers’ attention than ever before. Its share of total TV viewing hasn’t grown in the US over the last year, and the company said that its average member is watching about the same amount of TV as a couple years ago. 

Netflix could increase its share of viewing through acquisitions, especially as companies such as Warner Bros. and Comcast are restructuring. But the company prefers to grow internally, Chief Financial Officer Spencer Neumann said on a call with analysts. Management expects engagement to increase in the second half of this year and believes the company can steal share from competitors.

Netflix’s user growth in the US has slowed, according to market researcher Antenna. The company boosted its customer base for a couple of years by cracking down on password sharing. The benefits from that program have started to wane.

However, domestic revenue in the second quarter grew 15%, buoyed by recent price increases. The company is trying to draw in customers with a lower-cost, advertising-supported offering in a dozen markets. Its advertising sales are expected to double this year.

Copyright Bloomberg News