Netflix still has a long way to go

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

streaming stocks represented by woman watching tv on tablet

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Netflix (NASDAQ: NFLX) investors were able to exhale after the streaming service announced its second-quarter results on Tuesday afternoon. The stock initially moved higher, after the market was encouraged to see Netflix lose less than half of the subscribers that the platform thought it would shed sequentially during the period.

There is certainly some long overdue relief to Netflix losing only 970,000 net subscribers between the end of March and the conclusion of June. Back in April, Netflix was bracing investors for two million net defections. However, there is more to this relative success story — and subscriber guidance — than meets the eye. Let’s take a closer look.

Three people leap over a sofa.

 

Image source: Getty Images.

Stranger danger things

It didn’t take long for bears to point out the soft spots in the financial update. If Netflix held up better than expected on the subscriber front, why did reported revenue fall short of the company’s own guidance?

If sequential subscriber growth is returning in the current quarter after back-to-back periods of sequential declines, why is Netflix’s outlook for the third quarter less than what Wall Street pros are modeling?

Things aren’t as bad as the naysayers’ questions suggest. Let’s start with the “miss” for the second quarter. Netflix was targeting 9.7% in year-over-year revenue growth. The top line only rose 8.6% on a reported basis, but that’s not the whole story.

This is a global juggernaut, as more than half of its revenue is now being generated overseas. With the dollar surging against most global currencies, there will be a lot, literally, lost in the translation. Netflix points out that there was a $339 million negative foreign currency impact on the top line in the second quarter. Back that out and revenue would’ve risen a better-than-expected 13% on a constant currency basis. 

Guidance for the current quarter is less than where analysts are perched, but that also is a matter of foreign exchange swings that are beyond the scope of Netflix’s springtime prognostication skills.

The third quarter seems uninspiring beyond the return to net additions for the first time in 2022, but it’s not as bleak as the headline numbers may suggest.

Netflix is eyeing 221.67 million streaming paid memberships worldwide by the end of September. This is a million more than the current count, but it’s still just shy of the 221.84 million accounts it had on its books when the year began. 

The new subscriber goal is just 3.8% higher than where Netflix was at that point last year. It’s a historical low, but this naturally includes the back-to-back quarters of net defections the platform experienced through the first half of this year.

The 4.8% year-over-year increase in revenue that it’s targeting for the third quarter is short of the 8% that analysts were modeling, but — again — the strong dollar blurs the passport picture here. On a constant currency basis, Netflix expects its revenue to rise 12% for the current quarter.

The exchange rate blizzard blows through the income statement, as its forecast of a 29% decline in operating profit would be just a 3% dip. Operating margin would be at 20% instead of the implied 16% in its outlook. 

In short, it’s not as bad as it seems. It’s also important to frame things in the right light. I’ve seen a couple of boobirds online point out the audacity of Netflix stock rising despite the company shrinking its audience by nearly a million subscribers.

The obvious counter is that Netflix was expecting to lose more than twice as many paid memberships, but there’s a better argument. Netflix stock was at $348.61 three months ago, minutes before the company announced it would lose two million net subs for the upcoming quarter. Netflix poking its head above $200 on Wednesday isn’t a victory lap. 

Netflix has a long way to go, and the good news is that it’s far from complacent right now. The launch of an ad-supported tier should help it retain cost-conscious subscribers.

Starting to crack down on password sharing — through Latin America, initially — could backfire, but if it works, there could be a new higher-priced tier for multi-household families or splits that translate into membership growth.

Netflix is still the king of the hill when it comes to streaming service stocks, and this week’s mixed report is actually better than it seems on most fronts. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Netflix still has a long way to go appeared first on The Motley Fool Australia.

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Motley Fool contributor ick Munarriz has positions in Netflix. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Netflix. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.



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