Checking in on the Netflix Results

Netflix released third quarter earnings this afternoon. Expectations were low; the stock is down nearly 60% this year.

The company's valuation stands at 3.5x sales; the lowest valuation since coming out of the 2008 crisis.

In short, things haven't been going great.

But they stopped the bleeding. Netflix added 2.4 million subscribers in the third quarter. This was a nice surprise after losing subscribers in the two previous quarters and they also projected 4.5 million subscriber additions next quarter.

The stock was up 14% on the release despite the fact they reported the slowest pace of revenue growth in company history.

The law of large numbers comes for everybody.

But the market seemingly set a low bar and they cleared it.

In the shareholder letter, the company came out swinging. In a world that now prioritizes profits over growth, Netflix made it very clear their competition can't compete on profits.

"Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard - we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix's $5 to $6 billion annual operating profit."

(Unrelated: imagine what those operating losses would be if Quibi was still alive. RIP Quibi we miss you!)

The revenue growth (or lack thereof) seems to be les of a concern considering the launch of an ad-supported tier in certain global markets starting November 1st. Details on that:

"To start, we’re keeping it simple by offering one low-priced ad plan – Basic with Ads – at a price that’s 20%-40% below our current starting price. So in the US, for example, Netflix will now start at $6.99 per month (compared to $9.99 today). The Basic with Ads plan will have ~5 minutes of advertising per hour, frequency capping and strong privacy protections."

They're launching ads in Canada, Mexico, Brazil, Germany, and a few other non-US markets first. It's hard not to see a world where this is successful for them what's they fully roll it out in the US.

Another interesting part of the shareholder letter (probably the most interesting) included the fact Netflix will no longer be reporting paid subscriber numbers starting next year:

" As discussed in previous letters, we are increasingly focused on revenue as our primary top line metric. This will become particularly important heading into 2023 as we develop new revenue streams like advertising and paid sharing, where membership is just one component of our revenue growth. So, starting with our Q4’22 letter in January of 2023, we’ll continue to provide guidance for revenue, operating income, operating margin, net income, EPS and fully diluted shares outstanding for the following quarter, but not paid membership. Similar to our regional membership disclosure, we’ll continue to report our global and regional membership each quarter as part of our earnings release."

This part is interesting and likely indicates Netflix is acknowledging the days of hyper user growth are history.

They're evolving into a slower growing company that will focus on profitability. There's certainly an audience that will dunk on them for this, but it also might be a sign the management team sees what's happened in the market this year and is reacting.

The US and Canada, Netflix's largest markets, only added 100k subscribers in the quarter. Over the past five quarters, Netflix has still cumulatively lost subscribers in these markets.

So by not reporting paid subs Netflix is effectively saying "we don't want to be judged on that metric anymore", in effect, admitting the future will not look like the past. So be it, companies evolve and change over time.

Maybe Netflix won't grow like the past and get a 10x price/sales multiple from investors.

But Netflix still has a wonderful brand, they're pulling on new revenue levers (advertising soon and possibly gaming in the future), and their competition will either consolidate or spend themselves to death in the very near future.

All a story worth following.