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Headlines
- Q2 Results: Membership Growth Momentum Stuns
- Revenue Growth Reflects Membership Expansion, Ad Tier Addition
- Netflix's Valuation Remains Attractive Despite Strong Gains
Netflix (NASDAQ:NFLX) recently released its Q2 results, showcasing continued acceleration in both membership and revenue growth. Despite intense competition, the streaming giant remains dominant, with its scalable unit economics fueling even more significant earnings growth. This positive trend is expected to continue, which is likely to keep fueling the stock’s ongoing bullish momentum, even after its notable recent gains. Consequently, I remain bullish on NFLX stock.
Q2 Results: Membership Growth Momentum Stuns
Netflix’s Q2 report revealed a striking acceleration in both membership and revenue growth, a trend that has persisted for several consecutive quarters. To illustrate this ongoing momentum, consider Netflix’s year-over-year growth in paid subscribers over the past 10 quarters. Initially, one might argue that Netflix’s accelerating growth could be due to the slower pace observed between 2022 and 2023, coupled with the company’s efforts to curb account sharing. However, the sustained acceleration over several quarters suggests a deeper trend: Netflix is solidifying its dominance in the streaming market and setting a benchmark for communication stocks.
This trend becomes more apparent when compared to other streaming services struggling to maintain, let alone grow, their subscriber base. For instance, Disney+ reported 153.6 million members in Q2 2024, down from 157.8 million the previous year. Similarly, Peacock’s paid subscribers in the United States fell from 34 million in Q1 2024 to 33 million in Q2 2024.
In stark contrast, Netflix continues to exhibit robust growth, suggesting that households are gravitating toward Netflix as their primary streaming service while potentially canceling secondary subscriptions. It’s also important to note that despite Netflix’s announcement in Q1 that it will stop disclosing subscriber figures starting in Q1 2025, which raised concerns about potential subscriber declines, the company’s momentum remains strong. Even if membership growth slows, Netflix clearly will not face an imminent drop in subscribers.
Revenue Growth Reflects Membership Expansion, Ad Tier Addition
Netflix’s revenue growth in Q2 reflected the underlying membership expansion while benefiting from the still relatively new ad-supported tier. Revenues amounted to approximately $9.56 billion, up 16.8%, marking the best quarterly top-line increase in 12 quarters. Management commented that the ad-supported tiers have reached about two hours of viewing time per account per day, comparable to the engagement documented in non-ad plans.
While the revenue per user from ad-supported memberships currently lags behind that of non-ad-supported memberships, there are two factors to note here: first, the ad-supported tier brings in revenue previously untapped from those not willing to pay at all, and second, the gap between its subscription and ad-supported revenue actually represents a significant growth opportunity as the company keeps expanding its ad inventory and adding quality advertisers.
Netflix's Valuation Remains Attractive Despite Strong Gains
Netflix stock has rallied 43% over the past year. Following the company’s Q2 results, it’s evident that the streaming giant’s valuation remains attractive. The significant re-acceleration in revenue growth and Netflix’s easily scalable unit economics have translated to even more substantial earnings growth. Specifically, net income grew by 44.3% to $2.15 billion.
Building on strong earnings growth in the year’s first half and anticipating similar performance in the latter half, consensus estimates project a full-year EPS of $19.15, reflecting a remarkable 59.2% increase year-over-year. This estimate also implies a forward P/E of about 33x based on the stock’s current price, which is reasonable given the underlying earnings growth and clear dominance in the space. Analysts expect that EPS will continue to grow by roughly 20% per annum in the coming years, which should justify this multiple and potentially allow for further gains.
