Netflix (NFLX -0.44%) has officially closed the curtain on the subscriber slump from a year ago. The leading streaming service smashed expectations in its third-quarter earnings report, adding 8.8 million subscribers. This is the fastest membership growth it's delivered since the pandemic and an unusually strong pace for the seasonally slow third quarter.
Revenue rose 7.8% to $8.54 billion, edging out the company's own forecast. Operating margin came in at 22.4%, and earnings per share jumped 20% to $3.73, ahead of the analyst consensus of $3.49.
The company shared some other delightful details with investors. Its ad-based membership is up nearly 70% from the second quarter, and 30% of sign-ups in countries where it offers an ad plan are choosing the ad-supported tier.
Additionally, the company said it would hike prices again on ad-free plans in the U.S., U.K., and France on basic and premium ad-free plans, leaving the standard ad-free plan at $15.49/month in the U.S. The move seems intended, in part, to drive increased ad-based subscriptions and will grow profitability, as well. The company is also eliminating the basic tier, the lowest-priced of the ad-free options, in several more countries for new and returning members after it did the same in the U.S. and a few other major markets.
The numbers elicited cheers from Wall Street, as the stock was up 12% after hours on Wednesday. While investors were likely pleased with the price hike and the emergence of the ad business, the paid-sharing program and the contingent jump in its subscriber base is the real star.
Image source: Netflix.
Netflix's paid sharing program helped it add 9 million new subscribers
When Netflix lost subscribers two quarters in a row last year, investors largely left the stock for dead, assuming the growth story was over. Since then, however, the company has rethought its business model and reinvigorated its growth, thanks to paid sharing and the new advertising tier, which is still building momentum.
Over the last two quarters, Netflix has added nearly 15 million new members, more than it did in the previous five quarters. A major reason for that growth is the paid-sharing program, or its crackdown on password sharing.
The company began rolling out paid sharing in May, giving users who weren't part of a paying household notice that they have two choices: sign up for their own account, keeping their preferences, or have the account they're borrowing from add them for $7.99/month.
Management has been clearly pleased with the paid-sharing program, saying that the cancel response has been lower than their expectations. On the earnings call, management also said that it expects paid sharing to drive incremental subscriber growth over the next several quarters.
It's said before that there were over 100 million viewers using Netflix and not paying for it. That's a huge pool of potential subscribers and profits for the company to tap.
The streamer's next round of growth
Netflix's revamped pricing model and its new ad-based tier complement the paid-sharing strategy well. The ad-based tier costs just $6.99/month, and Netflix continues to argue for the compelling value it offers, noting that that price is less than a single movie ticket.
Prior to the ad launch, its cheapest plan was the basic tier for $9.99/month, but with the cheaper ad tier now available, Netflix can make a more compelling value proposition to the password sharers.
The company also wants to grow the ad tier to ensure its advertisers have a significant audience. Having a pool of value-conscious viewers to guide toward the ad tier fits perfectly with its strategic goals.
Is Netflix stock a buy now?
In its fourth-quarter guidance, the streamer called for similar subscriber growth in the third quarter, showing the tailwinds from paid sharing will continue. It expects revenue growth to accelerate to 10.7%.
The company also said profitability would improve next year, even as it anticipates cash content spend increasing to as much as $17 billion, up from $13 billion in 2023. This is $1 billion less than expected, due to the strikes. For 2024, it expects an operating margin of 22%-23%, up from its increased target of 20% in 2023.
With the subscriber momentum from paid sharing, the impact of price hikes, and a boost from the ad tier, Netflix now looks as strong as it's been since the height of the pandemic.
Management said it sees no ceiling on operating margin, a reminder that profits can still move significantly higher from here, especially if the company's subscriber base keeps growing. Additionally, the stock is reasonably priced, and Netflix just announced a new $10 billion share-buyback program.
Don't be surprised if the pop in subscriber growth sparks a new round of growth for the company and another leg up for the stock.
