Another spectacular quarter expected at a delicate time for the market

On 18th April Netflix, the US streaming giant, is scheduled to release earnings for the first quarter of 2024. The market is expecting earnings per share growth of $4.54, and for revenues to expand by $9.26bn, net income is expected to be $199bn, while operating profit is expected at $2.42bn. For Netflix and the other streamers, it is not just the revenues and profits that matter, the number of new subscribers added each quarter is a very important metric that can drive the share price. The market is expecting 4.2 million additional subscribers in Q1, after a 13 million gains in Q4 2023.

Overall, the market is expecting another set of stunning earnings for Netflix for Q1, and some think that consensus expectations for subscriber growth are too low, which opens up the possibility of an upside surprise for the number of new subscribers Netflix added at the start of this year. It is worth noting that analysts have already upgraded their forecasts for revenue, EPS and profits, if subscriber growth is significantly higher than expected, we could see revenues even larger than currently predicted.

Netflix subscriber growth bonanza expected to continue

Netflix has experienced two of the biggest growth periods in its history in recent years. Firstly Covid, and now the crackdown on password sharing, which is driving subscriber growth. Netflix is in the middle of its second major growth phase, and the boost from the crackdown on password sharing is expected to continue. Analysts do not expect a slowdown in subscriber growth until 2025.

Some analysts argue that this is optimistic, however, the company estimates that 100mn users share their passwords, in 2023 the crackdown has added 30 million new subscribers, thus there could be more subscriber growth to come.

Revenue growth needs to improve  

It is also worth watching revenue growth. While the focus has been on subscriber growth in recent quarters, revenue growth has not been spectacular. For example, last year revenue growth slowed to 8.6%. The market is sensitive to any pockets of weakness in earnings reports, for example last week’s JP Morgan’s share price slumped after it missed estimates for net interest margin for Q1.  Thus, the market may want to see stronger revenue, so this is also a metric to watch on Thursday.

Margin growth is also worth watching. Netflix guided margin growth at 24% for this year. If Netflix wants to reach this level of margin growth, then revenue growth may need to pick up to the low to mid-teens in 2024. Thus, disappointing revenue growth is a risk for this earnings report.

Expect volatility after the earnings report

The average 1 day move after Netflix’s earnings reports for the last 8 quarters has been 12.79%. Thus, if Netflix can extend its strong earnings reports and boost subscriber growth above expectations, then we could see another positive reaction in the stock price. Overall market volatility is higher right now, so the gains may not be quite as large as they were in January after the Q4 blowout earnings report, but we still expect the market to react to any good news.

The future outlook

The future outlook is also worth watching. Netflix could reiterate that the password sharing crackdown will continue, which is positive for subscriber growth down the line. Added to this, favourable pricing dynamics could still be well absorbed by consumers particularly in Europe and the US. The company has also shaken up its film studio department. The new head has said that the platform will no longer be the home of expensive action flicks starring big movie stars. Instead, the focus could shift to improving the quality and variety of content on offer to Netflix’s large consumer base. As Netflix continues to grow its subscriber base, expect more varied content. This shift could be positive for margins, since action films tend to need major investment and are costly to produce.

Netflix’s future outlook could also be driven by the demise of some of its rivals, particularly Paramount and Prime. Falling investments by Netflix’s rivals along with consolidation in the streaming sector more broadly, could help cement Netflix’s position as the world’s largest streaming service.

While there is no doubt that the streaming sector is a crowded space, demand is still intact. In America, the average adult spends 10 hours per day with the media, 5 hours is spent watching TV. Thus, there is still opportunity for Netflix.

Asian growth could be tricky

We will also be looking out for an update on expansion into Asian markets. This could be tougher compared to expansion in Europe due to the heterogeneity of these markets. For example, India, Netflix’s largest Asian market, has 22 different languages and very different cultural preferences for content across the country. While Asia is a massive growth market for Netflix, there are challenges and sensitivities that they need to address to ensure expansion is successful.

Overall, the market is used to expecting strong earnings reports from Netflix, so the pressure is on for another descent report. Ahead of this report, Netflix’s stock price has had a rough time of it in the past month, in line with the overall market. Its stock price is down by more than 3% in the past week, and is lower by 2.53% in the past month. However, it is still higher by more than 25% so far this year.