Netflix exceeded market expectations in all key metrics in the third quarter, with its shares approaching an all-time high. However, the soaring share price has sparked concerns of a potential overvaluation.
Netflix reported third-quarter earnings that surpassed analysts’ expectations in all major metrics, driving its share price up nearly 5% to $723 (€667) per share in after-hours trading, just shy of its all-time high of $736.
Netflix shares have risen 42% year-to-date and more than 400% from their 2022 trough when a sharp slowdown triggered heavy sell-offs.
The US-based firm has outperformed market estimates for the past three quarters, thanks to the success of its ad-supported tier.
Membership in this ad-supported option rose 35% compared to the previous quarter, following a 34% increase the quarter before.
Netflix’s subscriber growth accelerates
The world’s largest streaming service added five million new subscribers in the third quarter, surpassing the expected 4.5 million, bringing its total to 282.7 million.
This further consolidates its position as the most popular streaming business globally. The success is attributed to its strategic changes since late 2022, including the introduction of a cheaper, ad-supported membership and a crackdown on password sharing, which has helped the company gain 60 million subscribers in two years.
The ad-supported tier is set to launch in Canada in the fourth quarter and more broadly in 2025.
However, the company will cease reporting subscriber growth numbers from 2025 onwards, shifting its focus to more traditional metrics such as profit margin and revenue growth.
Dilin Wu, research strategist at Peperstone, told Euronews Business: “The continued expansion of its advertising business not only diversifies revenue but also alleviates concerns about future profitability.”
Netflix also credited its strong growth to its high-quality content, including new series The Perfect Couple, Nobody Wants This, and Tokyo Swindlers, returning favourites such as Emily in Paris and Cobra Kai, and major films like Beverly Hills Cop: Axel F, Rebel Ridge, and Officer Black Belt.
Revenue and guidance
In the third quarter, Netflix’s total revenue rose by 15% year-on-year to $9.8bn (€9.1 bn), exceeding analysts’ expectations of $9.77bn (€9bn).
Its operating margin increased to 30%, up from 22% in the same quarter last year. The entertainment giant expects revenue to grow by 15%, or 17% on a foreign exchange-neutral basis, in the fourth quarter.
Paid net additions are also expected to be higher in the current quarter, driven by seasonal trends and a strong content line-up. Netflix anticipates revenue growth of between 11% and 13% next year.
Netflix’s largest market remains UCAN (the US, Canada, Australia, and New Zealand), where sales grew by 16% year-on-year in the third quarter.
The second-largest region, EMEA (Europe, the Middle East, and Africa), experienced similar growth.
Notably, the Asia-Pacific region (APAC) performed the strongest, with a 19% year-on-year increase in sales, attributed to localised content in Japan, Korea, Thailand, and India.
Sales in Latin America, however, grew at a more modest pace of 9%, impacted by price changes and a weaker content line-up.
Concerns over overvaluation
Despite these strong results, some analysts have raised concerns that Netflix’s password-sharing crackdown, while initially successful in boosting subscriptions, may lose its effectiveness over time, despite the ongoing strong momentum in its ad-supported tier.
Analysts suggest that Netflix will need to explore new avenues for expansion to maintain its competitive advantage.
The company’s soaring share price has raised concerns among some investors about a possible overvaluation.
Netflix’s Price-to-Earnings (P/E) ratio stood at 43 times as of Thursday’s close, higher than the broader market average.
As competition intensifies in streaming platforms, such as YouTube, Disney+, Amazon’s Prime Video, and Apple TV, Netflix’s ability to justify its current valuation may face increased scrutiny.
However, Wu pointed out that Netflix has already begun shifting its focus towards increasing customer engagement, rather than solely expanding its market share. She added, “The company is likely to concentrate on improving retention through targeted advertising strategies.”
