In the third quarter (ended Sept. 30), Netflix (NFLX 1.74%) posted revenue of $7.9 billion and diluted earnings per share of $3.10, both beating Wall Street analyst estimates. And the stock immediately popped 14% following the news after the market closed on Tuesday, Oct. 18.
But boosting investor sentiment even more is that in Q3 the streaming leader added 2.4 million new subscribers, which exceeded management's internal forecast of adding 1 million. And that's good reason for investors to consider adding the beaten-down growth stock to their portfolios. Let's look more closely.
Turning things around
Netflix's recent financial release was welcome news for shareholders after the business lost 200,000 and 1 million subscribers, respectively, in the first and second quarters of this year. Management mainly blamed the softening macroeconomic environment, as well as heightened competition for viewers' eyeballs, as key reasons for the weak start to 2022.
In the U.S. and Canada (known as the UCAN region), Netflix lost nearly 2 million members in the first half of this year, causing many to believe that the market has reached a peak in terms of customer growth. However, the UCAN region was able to bring on 100,000 new subscribers in the latest quarter. The leadership team credits some incredibly popular releases during Q3, like Monster: The Jeffrey Dahmer Story, Stranger Things S4 (second release), and The Gray Man as factors drawing in more viewers.
Management expects to add 4.5 million net new members during the fourth quarter. This reversal of fortunes compared to the first half of 2022 is clearly a positive sign for the leading streaming business and for shareholders who thought the company's growth story was over. Starting with the Q4 2022 financial release in January 2023, though, management will no longer provide its guidance for new subscribers.
Speaking of growth, there are two initiatives that should help bolster Netflix's prospects. First is the company's introduction of a cheaper, ad-based subscription tier, something that was long turned down by the leadership team because it could hurt the Netflix experience.
This new option will be available starting in November in 12 countries (U.S., Canada, Mexico, U.K., Spain, Australia, Brazil, France, Germany, Italy, Japan, and Korea). In the U.S., it will cost just $6.99 per month, and there will be four to five minutes of advertisements shown per hour. It's extremely likely that offering a lower-cost choice will help attract price-sensitive customers.
Additionally, Netflix has talked all year about finding ways to crack down on accounts that share passwords with other households. Starting next year, password borrowers will be able to transfer their profiles to their own accounts. And accounts will have the ability to create sub-accounts to share with friends and family. The goal, unsurprisingly, is for Netflix to drive greater monetization. Management thinks there are 100 million households worldwide that share passwords, so the opportunity to collect incremental revenue from these customers is significant.
For longtime followers of the business, the current year has shown a major improvement in Netflix's financial situation. The company has generated free cash flow of $1.3 billion throughout the first three quarters of 2022 and expects to produce more next year. What's more, the gross debt balance will remain under $15 billion, meaning that the company no longer needs to access outside capital to fund growth.
A more financially sound Netflix is an upgrade from the cash-burning machine we've all been accustomed to over the past decade. With shares currently trading at a price-to-earnings ratio of 25, near the lowest they've been in the past decade, investors might want to take a closer look at the streaming giant.
