Netflix Earnings: Solid Results as Paid Sharing Boosts Subscriber Growth

Netflix Stock at a Glance

• Fair Value Estimate: $330
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow

Netflix Earnings Update

Netflix NFLX posted a solid second quarter with net customer additions of 5.9 million, well ahead of our estimate. The firm benefited from the rollout of its password sharing crackdown—paid sharing—covering over 100 countries including the United States.

Despite the subscriber beat and additional shared account fees, revenue was in line with our estimate due in part to foreign exchange headwinds as well as stagnant average revenue per user, or ARPU, in Netflix’s two largest regions.

We are raising our fair value estimate to $330 from $315 to account for slightly higher subscriber growth in 2023, as well as marginally faster margin improvement.

Netflix ended the quarter with 238.4 million global paid subscribers, up from 232.5 million last quarter and 220.7 million a year ago. Customer growth in the quarter was spread across all four regions with Europe leading the way. Management expects further subscriber growth over the remainder of the year from paid sharing as the program rolls out to every country and borrowers in all markets continue to start new accounts.

Netflix Revenue Growth Stuck Below 4%

Revenue improved 3% (6% excluding the currency impact) to $8.2 billion, the third straight quarter with growth below 4%. Revenue growth has not hit double digits since the fourth quarter of 2021 despite price hikes and revenue enhancement initiatives like paid sharing and the introduction of ad-supported tiers.

Revenue in the U.S. and Canada was roughly flat despite a million more average subscribers as ARPU was also flat at $16. The region did post its strongest net add since the fourth quarter of 2021 (1.2 million), but Netflix’s most profitable region has still gained just 360,000 subscribers over the last six quarters. After the benefits of paid sharing wear off, we think that attracting new subscribers in UCAN will remain challenging due to the service’s high penetration rate and intensified competition.

Netflix introduced its ad-supported plan in November 2022, adding another revenue lever and slightly changing its growth outlook. However, management remains reluctant to share data on the number of users on the tier. While the company disclosed monthly active users of around 5 million globally in May, The Information reported that Netflix has only 1.5 million subscribers on the ad-supported tier in the U.S. as of June. We estimate that the company has around 68 million subscribers in the U.S. (90% of UCAN), implying that 2% of the base is on the ad-supporter tier. This relatively low penetration is probably one of the main reasons that Netflix canceled its Basic with Ads plan in both the U.S. and the United Kingdom on July 19. As a result, the cheapest ad-free tier now costs $15.50 per month, making the ad-supported plan at $7 per month more attractive. Since management claims that the ad revenue per user makes up the gap between the two plans, Netflix is indifferent to the consumer’s preference.