Earnings season for the quarter ended March 31 has officially kicked off, and Netflix (NFLX 1.74%) was the first major technology company to report its results. The streaming giant delivered a mixed bag, with solid subscriber growth but a muted earnings outlook.
With that in mind, here are three things investors learned from the company's report.
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1. Netflix added subscribers, but shelved guidance
Subscriber growth is the holy grail for streaming companies. The business model is simple: More subscribers equal more revenue, which means there's more money in the pool with which to invest in new content. That spins the flywheel and attracts even more subscribers.
In the first quarter of 2023, Netflix added 10.8 million subscribers compared to the same time last year, bringing its total to 232.5 million. It's an industry-leading membership base. Investors had been concerned about growth after Netflix lost subscribers (sequentially) in the first and second quarters last year, but its recent results suggest that was a blip rather than a recurring theme.
Netflix estimates its addressable market consists of more than 1 billion broadband households, up to 500 million of which are connected TV customers (i.e., they own a TV connected to the internet). Therefore, the company has captured less than half of its opportunity right now, and potentially less than one quarter of its longer-term opportunity.
In an attempt to entice new customers, Netflix has introduced a cheaper subscription tier that includes advertisements. Plus, the company is cracking down on password sharing. It estimates there are roughly 100 million subscription "borrowers" worldwide -- or those using someone else's subscription for free -- and they're low-hanging fruit when it comes to adding new customers.
While all of that sounds great (and it is), Netflix decided to stop offering guidance to investors regarding its potential subscriber growth for the next quarter. It's the first time the company has ever done this, and it can sometimes be interpreted as a negative: If it is expecting a fantastic result, wouldn't it want to inform investors?
2. Streaming still has a major engagement opportunity ahead
In 2021, streaming accounted for only 26% of the total time Americans spent watching television. The good news for Netflix (and other streaming companies) is that the pie continues to grow, because that figure now stands at 34%. The rest of TV time is spent viewing other modes like broadcast and cable, both of which are steadily declining.
Netflix on its own accounts for only 7% of TV time in the U.S. right now, so there's plenty of scope to snatch eyeballs away from its streaming competitors like Disney+ and Amazon Prime. Disney is cutting $3 billion from its content budget this year to save on costs, which opens the door for Netflix to capture more viewing time.
There's an even greater opportunity in emerging markets like Mexico, where streaming is still in its infancy with a 15% share of TV time, and Netflix representing 4%. In Poland, those figures are 7% and 2%, respectively.
The financial opportunity could be enormous in the long term. According to an estimate by Fortune Business Insights, the global streaming industry will grow by 19.9% per year to reach a value of $1.6 trillion in 2029.
3. Netflix's earnings outlook has weakened
When it comes to valuing a stock, subscriber growth only goes so far before dollars and cents really begin to matter. Netflix has passed that point -- which is supported by the company withdrawing subscriber guidance -- so when it submitted its earnings forecast for the upcoming second quarter of 2023, investors sent its stock down by as much as 10%.
The company estimates it will deliver $2.84 in earnings per share in the second quarter, which is down 1.3% sequentially, but down a more significant 11.2% compared to the same period last year. Netflix says most of the decline is attributable to currency gyrations, but when a company's bottom line begins to shrink, investors tend to rethink the valuation they're willing to pay for its stock.
Netflix has generated $8.94 in earnings per share over the last four quarters, and based on a current price of $327.98, its stock trades at a price-to-earnings (P/E) ratio of 36.7. That's 37% more expensive than the rest of the technology industry, as represented by the 26.7 P/E of the Nasdaq-100 index.
In the short term, it might be hard to convince investors to buy the stock at a steep premium to the broader market when its earnings aren't expected to grow. Over the longer term, though, Netflix is tackling a steadily expanding streaming industry from a leadership position. With a five-year investment horizon (or longer), it's much easier to justify buying its stock at the current price.
