Shares of streaming-video service Netflix (NFLX 1.97%) jumped on Thursday after the company reported financial results for the third quarter of 2023. Investors seem to be cheering how many new subscribers joined the platform over the last three months in light of recent changes to its business model -- the changes appear to be working. And that's why Netflix stock was up 16% as of 10 a.m. ET, soaring past $400 per share.
Were financial results good for Netflix?
During Q3, Netflix added nearly 8.8 million net new subscribers worldwide compared to the second quarter. The company hasn't had that many net new signups in years. During the past year, Netflix has prevented people from sharing passwords. And it's introduced lower-priced subscription tiers supported by advertising. Both moves seem to have stimulated subscriber growth, which is encouraging.
Among financial highlights in Q3, Netflix had an operating margin of 22.4%. This was higher than anticipated. And it had $1.9 billion in free cash flow for the quarter, which motivated management to increase its full-year guidance to $6.5 billion, up from $5 billion.
Can Netflix keep growing?
Looking ahead to next quarter and into next year, Netflix thinks it can keep growing profitably. Its operating margin for 2023 is expected to come in around 20%, which implies taking a step back in the upcoming fourth quarter. But in 2024, management hopes to achieve an operating margin of 22% to 23%, which would be its best ever profitability.
That said, Netflix does expect its expenses to increase next year for creating its original content. This is partly due to changes in Hollywood as a result of the recent writer strike. Therefore, the company's free cash flow could come in light.
One area to watch for Netflix is its ads business. Management says around 30% of new signups use an ad-supported tier. In the U.S. and Canada, revenue per user actually fell in Q3, which could be a result of the shift toward ads. However, it's reasonable to assume that the company's ad rates will increase in coming quarters, which could allow it to generate more revenue per existing user on an ad-supporter tier. That would be bullish for the company.
