Netflix (NASDAQ: NFLX) experienced robust growth in ad-supported memberships during its second-quarter report, even though investor response seemed subdued. Nevertheless, the stock has shown a 33% increase year-to-date.
Let’s delve into the streaming service provider’s Q2 results, the increasing role of ads in its future strategy, and whether this represents a favorable moment to consider investing in the company’s stock.
Expanding Ad-Supported Membership Base
Netflix disclosed impressive second-quarter results with revenue surging by 16.8% to reach $9.6 billion. The company has witnessed a steady acceleration in revenue growth over the past year, as illustrated in the table below.
| Metric | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 |
|---|---|---|---|---|---|
| Revenue growth | 2.7% | 7.8% | 12.5% | 14.8% | 16.8% |
Earnings per share (EPS) witnessed a climb from $3.29 a year ago to $4.88, marking a significant 48.3% improvement.
The global streaming membership base grew by 16.5%, reaching 277.65 million members. Concurrently, the company reported an impressive 34% sequential surge in ad-supported memberships.
Netflix mentioned that nearly 45% of sign-ups opted for ad-supported memberships where available. In the U.S., these memberships are priced at $6.99 per month, offering streaming on two devices simultaneously alongside the ability to download shows and movies. The gradual phasing out of basic subscriber plans in select regions has driven the growth of ad-supported plans. The company plans to extend this phase-out to the U.S. and France.
While advertising won’t be the main driver of growth this year or the next, Netflix projects it will achieve critical subscriber scale for advertisers in its ad-supported countries by 2025. The company has been introducing new advertising features, including displaying ads during show pauses. Additionally, Netflix is developing its adtech platform for testing in Canada later this year and for broader implementation next year.
Netflix’s recent incorporation of live events into its platform is expected to attract more ad revenue. The platform will broadcast two live NFL games on Christmas Day and intends to offer more live events without becoming overly dependent on sports rights. Beginning in 2025, Netflix will become the home for WWE’s Monday Night Raw in the U.S., Canada, U.K., and Latin America, generating additional ad inventory through these weekly shows.
Looking at guidance, Netflix raised both its full-year revenue and operating margin forecasts. The company now anticipates revenue growth for the year to fall between 14% and 15%, compared to the initial forecast of 13% to 15% growth. Operating margin expectations have been adjusted to 26% from the previous 25%. Netflix continues to aim for approximately $6 billion in free cash flow for the current year.
For the third quarter, Netflix projects revenue growth of nearly 14% to $9.7 billion, along with an EPS of $5.10.
Image source: Getty Images.
Opportune Moment to Invest in Netflix?
Netflix’s Q2 performance indicates a company with sustained business momentum, as membership growth was robust across all its regions. Over the next years, the company is set to shift towards a hybrid model as advertising assumes a more prominent role in its revenue strategy.
This represents a significant opportunity for Netflix. With its extensive viewer base and advertisers keen on targeting streaming audiences, the company is well-positioned to leverage this in the future. This opportunity extends beyond ad-tier plans to include ad-supported live events and less intrusive ad formats, such as on landing screens or during show pauses.
Trading at a forward price-to-earnings (P/E) ratio of under 29 times based on 2025 analyst estimates, Netflix’s current valuation is relatively favorable. Historically, the stock has often traded above a 40 times P/E ratio.
Given the impending advertising opportunities Netflix is poised to tap into over the next few years alongside its current valuation, this seems like an advantageous moment to consider investing in Netflix shares. While ads may not be the immediate revenue driver this year or the next, they are likely to steer the company’s growth in the forthcoming years.
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