Netflix rallies as margin expansion eases valuation concerns

Netflix (NFLX) reported its Q3 2024 earnings with strong results, beating expectations on both EPS and revenue. The company posted earnings per share (EPS) of $5.40, higher than the $5.12 expected by analysts, and significantly above the $3.73 EPS in the year-ago period. Revenue for the quarter came in at $9.825 billion, surpassing the $9.78 billion consensus estimate and reflecting a 15% year-over-year growth. Netflix also added 5.07 million paid subscribers, exceeding the consensus expectation of 4.52 million, although slightly below the whisper number of 6.5 million.

The company provided positive guidance for Q4 2024, forecasting revenue of $10.13 billion, ahead of the $10.05 billion estimate, along with EPS of $4.23, above the expected $3.90. Netflix expects an operating margin of 22% for Q4, a year-over-year improvement. The company also raised its free cash flow guidance for full-year 2024, now expecting between $6.0 billion and $6.5 billion, up from the previous forecast of approximately $6 billion.

Free cash flow (FCF) for Q3 2024 was strong at $2.19 billion, beating estimates of $1.73 billion and reflecting a 16% year-over-year increase. Operating income for the quarter came in at $2.91 billion, a 52% year-over-year increase, with an impressive operating margin of 29.6%, beating the consensus of 27.8%. This demonstrates Netflix’s growing profitability as it scales operations and manages costs effectively.

Regional subscriber growth was a key driver of performance. In the Asia-Pacific region (APAC), Netflix added 2.28 million subscribers, beating expectations of 1.56 million and showing a 21% year-over-year growth. However, in Latin America (LATAM), the company reported a slight subscriber loss of 70,000, compared to the year-ago gain of 1.18 million, attributed to recent price changes and a softer content slate. Despite this, revenue in LATAM still rose by 9% year-over-year.

One of the standout drivers of growth for Netflix continues to be its advertising business. The company reported a 35% quarter-over-quarter increase in membership for its ad-supported tier, which accounted for over 50% of sign-ups in countries where it is offered. Netflix remains optimistic about the long-term potential of its ad business, projecting critical ad subscriber scale by 2025 and continued growth in subsequent years.

Netflix is also advancing its in-house advertising technology, with plans to roll out its first-party ad tech platform in Canada next month and more broadly in 2025. Partnerships with major ad-buying platforms like The Trade Desk and Google DV360 are progressing well, further enhancing Netflix’s advertising capabilities.

Margins were another positive aspect of Netflix’s Q3 performance. The company achieved an operating margin of 29.6%, a significant improvement from the 22.4% recorded in the same period last year. This margin improvement was attributed to slightly higher revenue and the timing of spending. For the full year 2024, Netflix raised its operating margin guidance to 27%, up from 26%. This is important as valuation concerns have been a primary talking point for bears.

As Netflix continues to make steady progress in both its core business and new growth initiatives such as advertising, the company has guided 2025 revenue between $43 billion and $44 billion, with an operating margin target of 28%. This represents a positive long-term outlook as Netflix leverages its leadership position in the streaming market while expanding its revenue streams.

In conclusion, Netflix’s Q3 2024 earnings report delivered strong results across key metrics, with robust subscriber growth, expanding margins, and significant progress in its ad-supported tier. The company’s optimistic outlook for Q4 and beyond reflects confidence in its ability to sustain growth and profitability, driven by its diversified business model and strategic initiatives.