Netflix Performance Analysis

Key Takeaways

• Netflix exceeded analyst expectations for subscriber growth in Q2, adding over 8 million.
• The company's advertising segment is growing, but will not become a major source of revenue until at least 2026.
• Netflix stock initially dipped but recovered in after-hours trading.

Netflix Subscriber Growth

Netflix added 8 million subscribers, exceeding analyst expectations by 3 million. This pushed their total global subscriber count to over 277 million.

Reasons for Growth

Netflix has been implementing measures to limit password sharing outside of households, which might have converted some freeloaders into paying subscribers.

Popular releases like "Bridgerton," "Baby Reindeer," and "The Roast of Tom Brady" also quite possibly attracted new viewers.

While Q2 was strong, Netflix predicts slower growth in Q3 due to the diminishing impact of password sharing restrictions. They're also focusing on attracting subscribers to their new ad-supported tier, which saw a 34% increase in subscribers compared to the previous quarter, though specific numbers weren't provided.

Netflix Advertising

Investors are looking to Netflix's advertising tier as a potential growth driver. However, they stated that building the ad business will take time and won't be a major revenue source until at least 2026. This is likely due to the ad tier's small base compared to subscription revenue.

Investors are excited about the ad tier's long-term potential to generate new revenue streams for Netflix. They're focused on building the ad platform and user base before it becomes a major revenue source.

Slow Growth Because of

• The ad-supported tier likely has a smaller subscriber base compared to traditional subscriptions.
• Advertisers might still be experimenting with the platform, leading to cautious spending initially.
• Despite the slow initial impact, Netflix has reported strong growth in ad spending by major industries, suggesting advertiser interest is picking up.

Netflix is expanding partnerships with ad platforms like Google's Display & Video 360 to streamline ad buying for businesses. Also introducing new ad formats like "binge ads" and QR codes to enhance the advertiser experience. They're planning to launch their own ad tech platform by 2025, giving them more control and potentially improving ad effectiveness.

Video Game Expansion

Netflix is ​​expanding into video games in 2024. By offering a variety of games based on popular shows, they aim to create a more comprehensive entertainment experience. While many details remain unknown, the potential for subscriber engagement and revenue growth is undeniable.

Squid Game Takes Center Stage

Details remain under wraps, but speculation suggests it could be either a cooperative experience where players work together to survive, or a competitive battle royale where only one victor remains. The immense popularity of "Squid Game" makes it a prime candidate for a video game adaptation. This strategy leverages an existing fanbase and could further boost engagement with both the game and the show.

While "Squid Game" provides high-stakes thrills, Netflix isn't limiting itself. Games based on "Emily in Paris" and "Selling Sunset" are also planned. This suggests a broader strategy encompassing various genres, from romance to reality TV.

• Diverse gaming tastes for a wider audience. Fans of "Emily in Paris" might enjoy a fashion-focused simulation game, while "Selling Sunset" could inspire a real estate empire-building experience.

By creating games based on popular shows, Netflix strengthens its content ecosystem.

There are also unanswered questions

• Specific release dates and gameplay specifics for all the mentioned games are yet to be announced.
• Who's developing these games? Collaboration with established studios could provide valuable expertise.
• Will these games be included with a Netflix subscription, or will there be separate purchase costs?

Netflix: Fundamental and Technical Analysis

Netflix has impressive revenue and earnings per share (EPS) growth 23.7%, indicating a healthy and expanding business. They maintain a high profitability rating compared to its peers in the entertainment industry. Low debt to free cash flow ratio and a good Altman-Z score suggest strong financial health.

While not necessarily overvalued, Netflix's PE ratio of 44.93 suggests that Netflix's stock is considered fairly valued, but leaning slightly towards overvalued.

• Revenue annual growth rate of 23.7%
• Revenue has also grown steadily at an average annual rate of 13.2%.
• Return on equity of 30.1%

Netflix resides in a support/resistance channel. A breakout above resistance could signal a buy opportunity, while a break below support could indicate a sell-off. Recent price action suggests a short-term weakening trend, despite a potentially positive long-term outlook. A lack of correlation between volume and price movements makes technical analysis less clear-cut.

Bottom Line

Netflix delivered a strong Q2 performance, exceeding subscriber growth expectations and demonstrating continued financial health. Password sharing crackdowns and popular shows fueled subscriber gains, while the new ad tier shows promise for future revenue streams, albeit with a longer-term outlook. The company is also venturing into video games, leveraging popular shows to create a more immersive entertainment experience.

While some details remain unclear, Netflix appears to be on track for sustained growth, though investors should be aware of potential short-term headwinds and a cautiously optimistic outlook for Q3 subscriber numbers.