Netflix Earnings Show Return to Subscriber Growth; Ad-Supported Tier Should Boost Q4

Netflix Stock at a Glance

• Current Morningstar Fair Value Estimate: $290
• Netflix Stock Star Rating: 3 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable

Netflix Earnings Update

Netflix (NFLX) rebounded during the third quarter, adding 2.4 million net subscribers after two consecutive quarters of net losses to start 2022. Management expects subscriber growth to continue in the fourth quarter, projecting 4.5 million net additions, ahead of our previous projection but well behind the 8.3 million added in the final quarter of 2021. The fourth quarter should benefit from the launch of the ad-supported offering in 12 key markets. The firm’s other revenue-boosting initiative, efforts to crack password sharing, will be rolled out in the first half of 2023.

We are raising our fair value estimate to $290 from $280 to account for stronger subscriber growth from the ad-supported tier, slightly offset by slower average revenue per subscriber growth internationally.

Netflix ended the quarter with 223.1 million global paid subscribers, up from 220.7 million last quarter and 213.6 million a year ago. All four regions posted customer growth in the quarter with Asia-Pacific generating the strongest numbers. UCAN only grew by 0.1 million new customers and the net loss year to date remains at 1.9 million in 2022, easily erasing the 1.3 million it added in 2021. Over the last 24 months, Netflix has added just over 300,000 subscribers in its most profitable (by far) region.

Foreign exchange headwinds continued to hit revenue, which was up 6% (13% excluding the currency impact) to $7.9 billion. Revenue in the U.S. and Canada improved by 11% year over year as the 2022 price hike helped lift average revenue per user, or ARPU, 11% to $16.37. Given the high penetration in the U.S. and increased competition, we expect adding subscribers will remain challenging, leaving annual price increases as the main lever to drive U.S. revenue growth from consumers uninterested in the Basic with Ads plan.