Netflix in "reasonable shape" but investors "need a little more"

(Alliance News) - Netflix Inc's first quarter results "failed to set the market alight" on Tuesday, as the online video streaming firm reported operating profit and revenue in line with expectations.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: "Fundamental metrics show the business is in reasonable shape, but investors need a little more than that to shake off remaining concerns about a downturn lurking in the shadows."

In New York pre-market trading on Wednesday, the stock was down 1.5% at USD328.75. Shares closed 0.3% higher at USD333.70 on Tuesday, before the release of the results after the Wall Street closing bell. The stock is essentially flat over the past 12 months, down 4.3% after dropping last spring and slowing recovering since.

Netflix said operating income surged to USD1.71 billion in the first quarter of 2023 from USD550 million in the fourth quarter of 2022. However, the figure remained 13% below the USD1.97 billion achieved a year ago.

Net income jumped to USD1.31 billion from USD55 million quarter-on-quarter, but was also below the year prior. The previous year, net income totalled USD1.60 billion, representing a decline of 18% year-on-year.

Hargeaves Lansdown's Lund-Yates said Netflix's figures were the first big tech sector earnings to be released in a quarter that's expected to be the "worst since the pandemic started".

More positively, Netflix's revenue climbed to USD8.16 billion in the first quarter from USD7.85 billion in the fourth quarter, and was higher than USD7.87 billion a year ago.

Diluted earnings per share improved to USD2.88 from USD0.12 a quarter before, but were down from USD3.53 a year ago.

For the second quarter, Netflix said it anticipates diluted EPS to be slighter lower than in the first quarter, at USD2.84.

Russ Mould, investment director at AJ Bell, said that Netflix offering the ability to have a cheaper subscription tier if users put up with advertising was meant to be Netflix's golden ticket to reviving growth in the first quarter.

"So far, the results have not put a rocket underneath subscriber numbers, with the company missing market expectation for user growth," he said.

"Its initial attempts to crack down on password sharing have also backfired, resulting in many subscription cancellations rather than new sign-ups for those who were freeloading. It means Netflix has to work harder to have the type of content that could lure in viewers and encourage more of them to open their wallets."

Mould also pointed another major problem for Netflix: "a lack of consistent hits that become the 'water cooler' discussion point in the office, at home or in the pub."

He said: "Wednesday was a smash hit in the final quarter of 2022 and The Night Agent was the standout show in terms of popularity in the first quarter of 2023. But the problem lies in the ability to binge these shows – you can clear them in a day or two, meaning the rest of the time is spent yearning for something new to watch."

Victoria Scholar, head of investment at interactive investor, agreed: "As always content in king, and with Netflix cutting its content spend by more than USD1 billion in the first quarter there is also a risk that it could struggle to churn out the blockbuster hits that would keep subscribers coming back."

Looking ahead, Netflix expects second quarter net income to reduce slightly to USD1.28 billion and for operating income to decrease to USD1.57 billion. Revenue is set to increase to USD8.24 billion, meanwhile.

UBS looked positively on the first quarter results, upgrading the firm to 'buy' from 'neutral'.

"We see Netflix as the main beneficiary of easing competition in direct-to-consumer as peers focus on profits. We believe this will drive upside to subscribers/pricing power in the coming years while also keeping a lid on content costs, one of the biggest swing factors for profits/free cash flow," the bank said.

By Heather Rydings, Alliance News senior economics reporter

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