OTT giant Netflix released its Q3 2022 results after Tuesday’s Closing Bell on Wall Street, and Pivotal Research Group Internet/Media/Communications Analyst Jeffrey Wlodarczak took a nosedive into the report.
As he sees it, Netflix “reported moderately better than expected overall Q3 subscriber growth.” At the same time, in-line Q4 2022 subscriber guidance was offered.
That said, the dip in the subscriber growth is definitely worth noting.
Q3 2022 subscriber growth is down nearly 50% from Q3 2021.
In-line Q4 ’22 subscriber guidance is down roughly 50% year-over-year.
There are positives that Wlodarczak has outlined, including in-line 6% revenue growth (weighed down by the strong dollar), and a better-than-expected Q3 operating income decline (-13%), thanks to programming expense timing.
But, a “materially worse than expected” Q4 revenue and operating income driven mainly by a weak dollar and the aforementioned programming expense timing is something that Wlodarczak will continue to monitor.
“The best we can say about this result is that the subscriber fly wheel which had been spinning in the wrong direction in the first half of 2022 at least managed to eke out a little better subscriber growth, including slight net addition growth in the core markets of the U.S. and Canada, and EMEA,” Wlodarczak said. “The low/no growth outlook in most developed markets reflects already full household penetration levels (when including piracy) and rising competition.”
Most of the subscriber growth — 60% in the third quarter — continued to be driven by APAC (and India specifically). But, Wlodarczak reminds investors this “is a materially lower ARPU opportunity.”
Once the results came out, Pivotal “moderately tweaked” its second-half 2022 subscriber forecasts higher, mainly to account for the higher Q3 net new subscribers. But, it also materially reduced Pivotal’s second-half operating income forecasts mainly to account for the strong dollar.
On a longterm basis, the visibility isn’t so great for Netflix either. “We continue to believe increasing levels of spending and competition are going to limit NFLX’s ability to grow that free cash flow materially from there,” Wlodarczak said.
With excitement over an ad-supporter tier “misplaced,” in his view, Wlodarczak concludes, “The bottom line is that the sky (at least temporarily) is not completely falling on the key subscriber fly wheel and while subscriber growth is expected to slow dramatically in ’22 (down ~70% year-over-year). At least it is not going to be negative and investors can hold out hope that the launch of an ad tier and better monetization of ‘pirates’ will drive decent ARPU growth. But, a return to material subscriber growth (in core markets in particular) seems to be wishful thinking against the backdrop of already high penetration rates in developed markets and rising levels of competition.”
Pivotal forecasts that Netflix can grow its EBITDA at a roughly 9% CAGR from 2023-2026 at a new $200 Year-End 2022 price target. This would see NFLX trade at 16X ’22 EBITDA (up from $175 and 14X previously).
Great, right?
Not wholly. “Given the market is placing a current rich value of 21X EBITDA on this asset we have no choice but to leave our SELL rating unchanged,” Wlodarczak concludes.
View the Netflix Q3 2022 earnings report by clicking here.
