Netflix's Earnings Call: A Surging Stock and What It Means for Investors

Wall Street has responded positively to Netflix's recent Q3 earnings report. With increasing competition in the streaming industry, the question now is whether you should consider investing in Netflix.

The streaming sector has seen intense competition over the past few years, with major players like Amazon and Apple vying for viewer attention. These companies have poured billions into creating content, making the competition financially demanding. While exact financial metrics for viewership across these platforms can be tricky to ascertain due to their reporting methods, it's evident that many companies are struggling to make this model profitable.

Although few companies possess the significant financial resources that Apple does, there are reports suggesting that Apple is now looking to tighten its spending. The company has invested at least $20 billion in original content over the past five years, excluding substantial licensing costs. Despite this massive expenditure, Apple's share of U.S. TV viewing remains a modest 0.2%.

In contrast, Netflix (NFLX 11.09%) continues to establish itself as the leader in the streaming industry. Pioneering the streaming concept, Netflix remains ahead while others are still trying to catch up. Let's delve into what has contributed to Netflix's ongoing success.

Consistent Revenue Growth and Strong Earnings

The streaming giant released its third-quarter earnings on October 17, and the results exceeded market expectations for both revenue and earnings per share (EPS). Following the news, Netflix's stock price surged about 10%. While it's no longer the sole profitable streamer, it has consistently maintained this status over the years. In comparison, Walt Disney reported a modest operating income of $47 million from its various streaming services, including Disney+, Hulu, and ESPN+, whereas Netflix's operating income for Q3 was nearly $3 billion.

The trend of rising operating income for Netflix can be seen in the financial data presented in the company's earnings reports.

Innovative Subscription Models

The initial appeal of streaming services was the promise of high-quality content at a more affordable price than traditional cable without any advertisements. However, as competition grew, many consumers found that this promise had changed. Platforms like Hulu led the way in introducing ad-supported models, allowing users to choose between lower-cost options with ads or more expensive ad-free subscriptions. Netflix followed suit with its own ad-supported tier, launched in late 2022, which proved to be a significant boost to the company's finances. Ad-supported subscriptions increased by 35% last quarter, demonstrating that lower price points can attract a broader audience while ad revenue offsets any potential income losses from these cheaper options.

Continued Success in Content Delivery

While several streaming services struggle to produce popular content, Netflix is seeing success. Recent hits include shows like Nobody Wants This and House of Ninjas, the latter outpacing Apple's $250 million Masters of Air in U.S. viewership. With the second season of the blockbuster Squid Game set to premiere soon, Netflix is maintaining a robust pipeline of successful original content.

Despite perceptions of a saturated market, Netflix still holds only 8.4% of total U.S. TV viewing, leaving substantial growth potential ahead. Although the stock's price-to-earnings ratio (P/E) hovers around 40, many analysts believe its growth prospects justify this premium. Netflix currently seems well-positioned in the market, with ample opportunities for expansion and flexible pricing strategies that could further enhance revenues. While the battle for streaming dominance continues, Netflix is clearly in a strong position.

Netflix, Earnings, Investing