Netflix
(NFLX) reported
another
quarter
of
incredible
subscriber
additions
and
revenue
and
profit
growth.
However,
full-year
sales
guidance
portends
a
deceleration
in
the
second
half,
and
we
suspect
the
firm’s
decision
to
stop
regularly
reporting
subscriber
numbers
in
2025
supports
our
belief
that
yearly
subscriber
additions
will
reset
at
a
rate
significantly
lower
level
than
what
Netflix
has
experienced
over
the
past
six
quarters.
•
Morningstar
Rating:
2
stars
•
Morningstar
Economic
Moat
Rating:
Narrow
•
Morningstar
Uncertainty
Rating:
High
Netflix
added
9.3
million
net
global
subscribers
in
the
quarter
to
bring
its
total
to
over
37
million
net
additions
in
the
past
year.
The
16%
growth
in
the
subscriber
base
over
that
span
led
to
15%
year-over-year
sales
growth
despite
a
three-percentage-point
currency
headwind.
The
operating
margin
exceeded
28%,
up
seven
percentage
points
year
over
year
and
about
six
percentage
points
better
than
any
quarter
in
2023.
However,
while
second-quarter
guidance
implies
an
acceleration
in
revenue
growth,
full-year
guidance
of
13%-15%
growth
implies
a
deceleration
in
the
second
half.
Management
raised
its
full-year
operating
margin
target
by
one
percentage
point
to
25%,
which
also
means
some
rationalization
in
the
second
half.
After
adding
2.5
million
US
and
Canada
subscribers
in
the
quarter,
Netflix
now
has
more
than
81
million
UCAN
subscribers.
With
household
penetration
closing
in
on
60%
and
little
remaining
opportunity
to
transition
non-paying
users
to
paid
users
with
the
password-sharing
crackdown
that
was
widely
implemented
in
2023,
we
expect
UCAN
additions
will
decline
materially
from
recent
levels,
leaving
the
firm
to
rely
on
pricing
and
advertising
to
keep
sales
growth
high
in
the
region.
Netflix
Price
Rises
and
Advertising
We
think
there
is
ample
opportunity
to
raise
the
average
revenue
per
subscriber
in
UCAN,
but
we
don’t
believe
this
can
juice
sales
growth
as
much
as
gaining
new
subscribers.
After
increasing
prices
on
some
plans
late
in
2023,
average
revenue
per
UCAN
subscriber
jumped
nearly
7%
year
over
year
in
the
first
quarter.
We
also
think
advertising
will
bring
a
sizable
incremental
revenue
stream,
as
the
firm
is
still
not
close
to
fully
monetising
the
ad
inventory
it
has
created
with
its
ad-supported
tier,
even
as
subscribers
have
already
gravitated
toward
that
tier.
Ad-supported
subscribers
grew
65%
sequentially,
a
similar
pace
as
the
prior
two
quarters,
and
included
40%
of
all
new
gross
subscriber
additions
in
markets
that
offer
the
ad-supported
tier.
While
strength
in
subscriber
additions
was
broad-based
across
all
markets,
average
revenue
per
subscriber
growth
was
muted
outside
of
UCAN.
Local
currency
weakness,
country
mix,
and
an
ongoing
effort
to
find
the
right
price
points
will
likely
keep
consolidated
average
revenue
per
subscriber
from
growing
much
in
2024.
The
margin
strength
was
due
mainly
to
lower
cost
of
sales,
and
we
think
it’s
primarily
caused
by
lingering
effects
from
the
Hollywood
strikes
in
the
second
half
of
2023,
which
shut
down
a
significant
amount
of
new
content
production.
Will
Netflix
Make
a
Pitch
for
NBA
Rights?
The
firm
reiterated
its
intent
to
spend
about
$17
billion
on
content
in
2024,
including
$3.7
billion
in
the
first
quarter.
The
further
we
get
from
the
strikes,
the
more
typical
gross
margins
should
be,
which
is
likely
a
big
reason
why
the
margin
should
contract
as
the
year
progresses.
In
the
long
term,
we
expect
margins
will
continue
expanding
as
the
firm
should
realize
operating
leverage
on
its
sales
growth,
including
continuing
content
spending
growth.
As
usual,
sports
programming
was
a
topic
on
the
earnings
call.
There’s
been
speculation
about
whether
Netflix
will
make
a
play
for
the
NBA
rights
that
expire
after
the
2024-25
basketball
season.
Nobody
addressed
the
NBA
rights
directly,
but
we’ll
be
surprised
if
Netflix
makes
a
big
move
in
that
direction.
Management
has
been
less
certain
in
recent
quarters
in
nixing
the
possibility
of
going
after
major
sports,
and
it
has
taken
small
steps
toward
live
sports,
particularly
with
weekly
WWE
Raw
matches
starting
in
January.
However,
we
were
pleased
to
hear
management
say
that
growing
profit
remains
critical
to
any
decision
they
make
and
that
Netflix
has
no
need
to
use
a
“loss
leader”
to
help
drive
its
business.
We
take
that
to
mean
that
it
is
skeptical
that
a
huge
cash
outlay
for
major
sports
rights
will
help
its
business,
and
we
agree.
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