Earnings season is in full swing, and one of the most scrutinized companies on Wall Street had a lot to report. Streaming giant Netflix (NFLX -0.63%) kick-started tech earnings last week.
Normally, investors tend to harp on certain key performance metrics for streamers, including subscriber growth. However, Netflix had far more to talk about than just growth in subscribers and traditional financial measures. The company is seeing progress in some new strategies. For instance, the launch of immersive experiences could take Netflix's brand to a whole new level.
Let's dig into the Q3 report and assess Netflix's results to see what lies ahead for the streaming giant -- and its shareholders.
The quarter at a glance
The table below shows revenue and earnings per share for Netflix's actual Q3 compared to its prior guidance. While Netflix beat its previous forecast on both the top and bottom line, it did so quite narrowly. For the quarter ended Sept. 30, Netflix added 8.8 million paid subscribers net of churn. However, the company's revenue only increased 4% quarter over quarter and 8% year over year.
| Item | Q3 2023 Actual | Q3 2023 Guidance |
|---|---|---|
| Revenue ($in billions) | $8,542 | $8,520 |
| Diluted Earnings Per Share (EPS) | $3.73 | $3.52 |
Source: Q3 Shareholder Letter.
While these results might look mundane, there is actually a bit to celebrate. Over the last several quarters, Netflix has announced a number of initiatives to drive revenue growth. For one thing, the company is cracking down on password sharing.
During its Q3 earnings call, Netflix also shared that its advertising tier subscriptions grew 70% quarter over quarter -- and that nearly 30% of new signups were to the ad plan. This is an encouraging trend signaling that the advertising tier is gaining momentum and has the potential to scale as the company releases this plan in additional markets.
But there is yet another catalyst in the pipeline that has me even more bullish on the company's future.
Image Source: Getty Images
What is Netflix House?
While the streaming industry is filled with competitors, I would argue that Netflix's top rival is Walt Disney. Disney has spent the last century building perhaps the most iconic (and valuable) intellectual property portfolio in the world. The company's movie and television characters are recognized around the globe by people of all age demographics.
Moreover, its theme parks have served as legendary destinations for fans of the Disney franchises. Netflix has spent billions investing in original content in an effort to keep subscribers engaged on its platform. But with the rise of Disney's own streaming service, Netflix has been hard pressed to expand its customer acquisition funnel. Until now.
Management spent a good portion of the earnings call talking about a new project called Netflix House. As part of the strategy, Netflix will be building immersive experiences in physical locations to "deepen fandom." In essence, these experiences will serve as a way for fans to connect with some of Netflix's most popular shows on a deeper level. My prediction is that Netflix House will ultimately serve as a means of building community among fans.
By allowing consumers to connect with content in an entirely new way, Netflix is effectively bringing more awareness to its overall brand. Moreover, Netflix House has the potential to become a new source of lead generation as some people will likely convert to paying subscribers after having positive experiences at these events.
Also, as more people document these physical experiences on the Internet and social media, Netflix should get a very good idea of consumer preferences and which markets could be ripe for additional locations.
Co-CEO Ted Sarandos also made it clear that Netflix House will require low capital expenditures as the company is not going to be building full-fledge theme parks. To me, this initiative is a direct shot at Disney. Netflix is looking to enhance its brand equity, and has seemingly found a way to do so at relatively low cost.
While it's difficult to forecast how much Netflix House will move the needle, I think the company is gradually going to unlock fierce customer loyalty, which should bode well for its recurring revenue business over the long term.
Netflix stock looks too good to pass up
Netflix shares trade at a price-to-earnings (P/E) multiple of 42, notably higher than the S&P 500's P/E of 25. Given the disparity between Netflix and the broader market, some investors may wonder if the streaming stock has run up too much.
NFLX PE Ratio data by YCharts
Yet, while high, Netflix's current P/E is still far below its level of a few years ago. Keep in mind that Netflix's business experienced more pronounced demand during the peak of the COVID-19 pandemic. As a result, the stock enjoyed unprecedented momentum and became disconnected from long-term fundamentals. Now, as growth prospects have normalized and competition heats up, the stock has taken a breather.
Even so, the company has quietly built a financial juggernaut. Netflix currently holds nearly $8 billion in cash and equivalents on its balance sheet and is expecting free cash flow of roughly $6.5 billion in 2023, up from its prior guidance of around $5 billion. On top of that, management announced that the company is increasing its share buyback program, which should serve as a positive signal for investors.
From my perspective, Netflix is well-positioned for its next phase of evolution. The company clearly has strong demand for its content, as evidenced by its subscriber additions and retention in the face of password sharing crackdowns and advertising plans. Furthermore, Netflix House has a lot of potential to uniquely position Netflix among its cohorts -- particularly Disney.
Lastly, with a war-chest of cash and a tendency to reward shareholders with buybacks, Netflix stock looks too good to ignore. Now could be a fantastic opportunity to dollar-cost average for long-term investors.
