Netflix (NFLX) Up 11.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Netflix (NFLX). Shares have added about 11.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Netflix due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Netflix Q2 Earnings Beat, User Loss Lower Than View

Netflix reported second-quarter 2022 earnings of $3.20 per share, beating the Zacks Consensus Estimate by 10.34% and the company’s guidance of $3 per share. Moreover, the figure increased 7.7% year over year.

Revenues of $7.97 billion increased 8.6% year over year but missed the consensus mark by 0.71%. Average revenue per membership increased 2% year over year on a reported basis and 7% on a foreign-exchange neutral basis.

The streaming giant lost 0.97 million paid subscribers globally, lower than its estimate of losing two million users. Netflix had added 1.54 million paid subscribers in the year-ago quarter.

At the end of the second quarter, Netflix had 220.67 million paid subscribers globally, up 5.5% year over year.

Netflix benefited from strength in its content portfolio. In its first four weeks, Stranger Things season four generated 1.3 billion hours viewed, making the show its biggest season of English TV ever.

However, Netflix is suffering from growing competition from services launched by Apple, Disney and Comcast, as well as the negative impact of Netflix accounts being shared. Sluggish economic growth and the ongoing Russia-Ukraine war have also negatively impacted growth.

Nevertheless, lower than estimated subscriber loss reflects Netflix’s superior content.

Segmental Revenue Details

UCAN reported revenues of $3.54 billion, which rose 9.4% year over year and accounted for 44.4% of total revenues. ARPU grew 5% from the year-ago quarter on a foreign-exchange neutral basis.

Paid-subscriber base decreased 0.9% from the year-ago quarter to 73.28 million. The company lost 1.3 million paid subscribers against the year-ago quarter’s loss of 0.43 million.

Europe, Middle East & Africa (EMEA) reported revenues of $2.46 billion, which climbed 2.4% year over year and accounted for 30.8% of total revenues. ARPU grew 6% from the year-ago quarter on a foreign-exchange neutral basis.

Paid-subscriber base increased 6.2% from the year-ago quarter to 72.97 million. The company lost 0.77 million paid subscribers against the year-ago quarter's net addition of 0.19 million.

Latin America’s (LATAM) revenues of $1.03 billion increased 19.6% year over year, contributing 12.9% of total revenues. ARPU grew15% from the year-ago quarter on a foreign-exchange neutral basis.

Paid subscriber base rose 2.5% from the year-ago quarter to 39.62 million. The company gained 0.35 million paid subscribers against the year-ago quarter’s net addition of 0.36 million.

Asia Pacific’s (APAC) revenues of $908 million increased 13.6% year over year and accounted for 11.4% of total revenues. ARPU decreased 2% year overyear on a foreign-exchange neutral basis.

Paid subscriber base jumped 24.8% from the year-ago quarter to 34.80 million. The company added 1.08 million paid subscribers in the quarter, up 5.9% year over year.

Operating Details

Marketing expenses decreased 4.8% year over year to $575 million. As a percentage of revenues, marketing expenses decreased 100 basis points (bps) to 7.2%.

Operating income decreased 14.6% year over year to $1.58 billion. Operating margin contracted 540 bps on a year-over-year basis to 19.8%.

Balance Sheet & Free Cash Flow

Netflix had $5.82 billion of cash and cash equivalents as of Jun 30, 2022, compared with $6 billion as of Mar 31, 2022.

Long-term debt was $14.2 billion as of Jun 30, 2022, compared with $14.5 billion as of Mar 31, 2022.

Streaming content obligations were $22.37 billion as of Jun 30, 2022, compared with $23.16 billion as of Mar 31, 2022.

Netflix reported free cash flow of $13 million compared with free cash flow outflow of $175 million in the previous quarter.

Guidance

For the third quarter of 2022, Netflix forecasts earnings of $2.14 per share, indicating 33% decline from the figure reported in the year-ago quarter.

Total revenues are anticipated to be $7.838 billion, suggesting growth of 4.7% year over year. The consensus mark for revenues stands at $8.08 billion, higher than the company’s expectation and indicating 7.99% growth from the figure reported in the year-ago quarter.

Netflix now expects to gain one million paid subscribers in third-quarter 2022 compared with the year-ago quarter’s addition of 4.38 million.

Netflix expects to end the third quarter of 2022 with 221.67 million paid subscribers globally, indicating growth of 3.8% from the year-ago quarter.

Operating margin is projected at 16% compared with 23.5% reported in the year-ago quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -22.18% due to these changes.

VGM Scores

At this time, Netflix has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Netflix has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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