Narrow-moat
Netflix
(NFLX)
reported
another
outstanding
quarter
despite
diminishing
tailwinds
from
the
crackdown
on
password
sharing
and
the
introduction
of
ad-supported
plans.
Revenue
growth
accelerated,
and
subscriber
additions
and
margins
remained
at
historically
high
levels.
We
still
believe
that
recent
results
represent
an
especially
booming
period
rather
than
a
durable
new
norm.
However,
the
firm’s
current
momentum
has
proven
longer
lasting
than
we
originally
anticipated.
We
are
raising
our
fair
value
estimate
to
$500
per
share
from
$440.
We
believe
the
stock
is
pricing
in
a
continuation
of
recent
trends,
and
while
we
maintain
that
Netflix
is
best-in-class,
we
still
expect
the
firm
to
experience
slower
periods,
making
the
shares
overvalued.
Key
Morningstar
Metrics
for
Netflix
Stock
•
Fair
Value
Estimate:
$500
•
Morningstar
Rating:
2
stars
•
Economic
Moat:
Narrow
•
Morningstar
Uncertainty
Rating:
High
Is
This
a
Growth
Peak
for
Netflix?
Second-quarter
sales
rose
17%
year
over
year,
the
best
quarterly
result
since
2021,
but
this
likely
represents
a
peak
for
growth.
The
company
has
now
lapped
its
broader
crackdown
on
password
sharing,
which
we
believe
is
largely
responsible
for
the
spike
in
subscriber
additions
that
began
in
the
middle
of
2023
and
has
continued.
Netflix
increased
its
subscriber
base
by
another
8
million
members
during
the
second
quarter,
including
by
1.5
million
in
the
US,
and
it
has
expanded
its
subscriber
base
by
nearly
17%,
or
almost
40
million
members,
over
the
past
year.
Netflix
has
still
not
yet
cracked
down
on
password
sharing
across
its
entire
membership
base,
which
is
one
reason
we
now
expect
a
longer
tail
of
elevated
subscriber
additions.
Still,
we
think
the
biggest
boost
from
a
perfect
storm
of
catalysts
has
now
passed,
especially
in
the
US.
We
expect
growth
in
average
revenue
per
member,
which
has
been
flat
over
the
past
year,
to
play
a
bigger
role
in
sales
growth
in
the
long
term.
ARM
increased
7%
year
over
year
in
the
US
for
the
second
straight
quarter,
but
ARM
declined
in
all
other
regions
due
mostly
to
a
combination
of
currency
weakness
and
a
mix
shift
to
lower-priced
markets,
like
India.
Netflix
Advertising
Growth
Can
Continue
We
expect
advertising
revenue
to
be
a
key
contributor
to
future
ARM
growth.
Netflix
is
still
not
yet
fully
monetising
the
opportunity
it
has
with
its
ad-supported
subscriber
base
and
doesn’t
expect
advertising
to
be
a
primary
driver
of
revenue
growth
until
2026.
The
firm
is
still
building
out
its
capabilities
for
advertisers,
including
through
its
own
ad-technology
platform,
which
the
firm
anticipates
broadly
launching
in
2025.
Based
on
occasional
disclosures
and
growth
rates
that
Netflix
discloses,
including
34%
sequential
growth
in
ad-supported
subscribers
this
quarter,
we
estimate
that
about
50
million
of
the
firm’s
278
million
subscribers
are
on
ad-supported
plans,
which
leaves
Netflix
ample
advertising
inventory
to
monetize
when
it’s
better
able.
Netflix’s
operating
margin
exceeded
27%
in
the
second
quarter,
up
5
percentage
points
from
the
same
period
last
year.
Management
raised
its
full-year
margin
expectation
to
26%,
which
is
up
1
percentage
point
from
its
previous
forecast
and
would
represent
6
percentage
points
of
margin
expansion
over
2023.
We
believe
Netflix
has
significant
operating
leverage
on
revenue,
so
we
expect
the
margin
to
continue
expanding
over
time.
Like
with
revenue
growth,
however,
we
don’t
expect
the
uptrend
to
be
uninterrupted.
We
expect
costs
to
rise
as
the
firm
builds
out
the
ad-tech
platform
and
other
support
for
advertising
sales.
We
expect
lower
margins
in
the
second
half
due,
in
part,
to
normalised
programming
expenses
after
the
Hollywood
strikes
shut
down
production
in
the
second
half
of
2023.
As
expected,
the
return
to
normal
production
has
weighed
on
free
cash
flow
compared
with
last
year,
when
it
was
artificially
high
due
to
the
lack
of
content
production.
The
firm
generated
$1.2
billion
in
free
cash
flow
during
the
quarter,
down
about
10%
year
over
year.
Netflix
reiterated
its
intention
to
spend
$17
billion
on
content
production
for
the
full
year,
and
it
continues
to
expect
free
cash
flow
of
about
$6
billion,
down
from
$7
billion
in
2023.
SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk
