Is Netflix (NFLX -9.09%) on the verge of a comeback?
The streaming specialist's shares have gained an impressive 34% in the past three months, easily outperforming the broader market in this period. Netflix's third-quarter results further jolted the company's stock, thanks to its results exceeding expectations. And although Netflix's stock remains down by more than 50% year to date, there are good reasons it could continue climbing from this point.
Let's see why Netflix's prospects look attractive right now.
Netflix's third-quarter financial results
All eyes were on Netflix's subscriber growth numbers heading into its third-quarter earnings release. The streaming giant had been losing paying members for the past two quarters. That's the primary reason why investors sold off its stock. Fortunately, Netflix did not disappoint in this area. The company added 2.4 million net new subscribers in the third quarter.
Although that's lower than the 4.4 million new subs it added during the year-ago period, it came well ahead of its expectations of 1 million new subscribers and snapped the recent streak of losing paying members.
That subscriber uptick wasn't the only positive sign in Netflix's report. The company's revenue of $7.9 billion increased by about 6% year over year and came in slightly ahead of management's expectations.
Netflix's net earnings per share of $3.10 decreased compared to the $3.19 reported during Q3 2021, but that still came in ahead of analysts' estimates. Further, the company's positive free cash flow (FCF) of $472 million was much better than the negative FCF of $106 million reported during the same period in 2021.
The growth story is not over
One solid quarter is not enough evidence to conclude that Netflix is back on a growth path, but recent developments also favor the streaming company. For instance, Netflix will launch an ad-supported tier in 12 key markets in November. This new strategy will help Netflix deal with the competition. To be clear, Netflix is already ahead of most of its peers in its most important markets in terms of television viewing time.
Also, it estimates that many of them are losing money. It's expensive to build a library of valuable content for consumers who want to binge-watch. Netflix would know. But a low-priced ad-supported tier could help Netflix pull further ahead of these other streaming platforms by attracting price-sensitive viewers and helping increase its paying members and revenue growth.
But that's not all. Netflix is working on a solution to its password-sharing problem. Starting next year, it will allow paying members to share their accounts with family or friends outside their households to create and pay for "sub-accounts." Password borrowers will get personalized profiles with tailored recommendations. In its first-quarter letter to shareholders, Netflix estimated that passwords are being shared with over 100 million households.
This solution could help the company get some of the money it is leaving on the table. It could take some time before Netflix fully feels the effect of these new initiatives, but running ads and cracking down on password sharing will have a meaningful impact on the company's top line. More money means more financial flexibility, and for Netflix, that means more valuable content.
The tech giant is an expert at producing shows and movies people want to watch, thanks to the vast amount of data it analyzes on viewer habits on its platform. Netflix's successful shows benefit from the best possible commercial: Word of mouth from friends and family members. Netflix's reputation has also benefited from the dozens of awards its movies have won.
That's how the company has continued to increase its engagement. In September, it accounted for 7.3% of television viewing time in the U.S., according to data analytics company Nielsen. That was up from the 6.5% it had had in September 2021. Note that the entire streaming industry is taking over the entertainment sector, increasing its share of viewing time from 27.7% in September 2021 to 36.9% in September 2022.
The growth of streaming and now digital advertising will be major tailwinds that will help Netflix continue to improve its financial results. The company may still be down from its lofty highs, but it is now well on its way to turning things around.
