"Netflix Stock: Analyzing the Post-Earnings Buy Potential"

Netflix reports strong third-quarter subscriber growth and anticipates a strong fourth quarter. Revenue is up 8% YoY.

Netflix had an impressive third quarter, with a significant increase in subscriber additions. However, it's important to consider other factors such as margins, cash flow, and underlying trends that contribute to the overall strength of Netflix's business. Looking ahead, Netflix anticipates a strong fourth quarter and there are several reasons to be optimistic about its future.

In light of these positive developments, we are raising our fair value estimate on Netflix stock to $350 from $330. However, we believe that the 12% spike in reaction to the earnings report may have been a bit too enthusiastic. We expect subscriber growth to moderate, and once the actors' strike comes to an end, there may be a substantial increase in cash content spending in 2024.

One of the key drivers of Netflix's growth in the third quarter was strong subscriber growth, which resulted in an 8% increase in total revenue compared to the previous year. The company added 8.8 million net additions during the quarter, the highest number since the second quarter of 2020 when pandemic-related lockdowns were in effect. However, it's worth noting that average revenue per member (ARM) remained flat or declined in all regions except for Latin America. Netflix attributed this to the introduction of a lower-cost ad tier, the absence of significant price increases over the past 18 months, and a shift in the mix of subscription plans.

Looking ahead, we see potential for growth in ARM over the next few years. Netflix has already announced price increases in several major markets, including the U.S., which is expected to contribute to higher revenue per member. Additionally, advertising revenue is likely to play a bigger role in driving the company's overall revenue. During the quarter, 30% of new signups opted for the ad tier in countries where it was available. However, Netflix is still in the process of expanding its ad infrastructure, including targeting and measurement capabilities, which will eventually result in higher ad revenue per ad-tier subscriber.

Netflix's operating margin continues to improve, reaching 22% in the third quarter, and is expected to be in the range of 22%-23% by 2024. This improvement is driven by the revenue drivers mentioned earlier, which provide operating leverage. However, we anticipate that expanding the advertising capabilities will lead to higher costs, as will the resolution of the writers' strike and, eventually, the actors' strike.

While we expect the pace of subscriber growth to slow down in the future, there may still be some tailwinds in the coming year. The crackdown on password sharing and the availability of a low-cost ad tier have created opportunities for price-sensitive subscribers who were previously using Netflix without paying. However, once paid sharing options are introduced to all accounts over the next year or so, we anticipate that the tailwind for new subscribers will diminish. Nonetheless, the strength in subscriber growth was widespread across different regions, and Netflix is confident about a similarly strong fourth quarter for new subscriber additions.

In conclusion, Netflix's third-quarter performance was impressive, with significant subscriber additions and positive trends in margins and cash flow. While there are reasons for optimism, it's important to consider the potential challenges ahead, such as moderating subscriber growth and increased content spending. Overall, Netflix remains a dominant player in the streaming industry with a strong foundation for future growth.