Netflix: Getting Closer To Its Target After Another Good Report


  • The cheaper tariff will help to avoid high churn rates soon – the new strategy allowed the company to restore the growth rate of the number of subscribers.
  • Due to a bigger share of “cheap” accounts, ARPU growth rate will slow down, but this will still not affect revenue.
  • The company’s spending on content will increase at a slower pace, and its ad expenses will decline in the medium term, which will have a positive impact on profitability.
  • Netflix is finally starting to generate, albeit small, steady, and rising cash flow, which will facilitate M&A activity and allow its shareholder compensation policy to take hold.
  • Despite strong stock gains over the past 8 months, Netflix is still undervalued (~30%), so we maintain a BUY status.



Investment Thesis

Netflix (NASDAQ:NFLX) reports excellent results for the third consecutive time. The implementation of the new strategy is already proving to be successful, and the potential for organic growth in financial performance remains. The implementation of new tariffs in emerging

According to Deloitte, consumers in most countries prefer streaming services with ads, but cheaper subscriptions, so the new Netflix tariff opens a large market for the company and significantly enlarges the target audience. According to a study by Dentsu, in 2023 the AVoD market will overtake the SVoD market in size.


Thus, we have revised our account growth forecast from 3.69 million to 13.74 million for 2023 and from 8.26 million to 12.78 million for 2024 on the back of the successful implementation of low-cost subscription versions. We had previously projected a strong slowdown in growth in 2023 due to the expected slowdown in the global economy, but now believe that the allocation of sub-accounts and the creation of ad-tier subscriptions will help fully offset the increased churn-rates due to lower real income, as users will be able to switch to a cheaper tariff in the event of financial hardship.

Invest Heroes

Given the factors listed above we have revised our international ARPU forecast from $10.09 to $9.59 for 2023 and from $10.53 to $9.96 for 2024. We expect growth to slow over the next three quarters (especially internationally), but at the same time there will be support in the form of dollar depreciation in the future.

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With the updated user forecast, we have revised Netflix revenue forecast upwards from $33 277 mln (+5.0% YoY) to $33 866 mln (+7.2% YoY) for 2023 and from $36 694 mln (+9.4% YoY) to $37 905 mln (+11.9% YoY) for 2024.

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Because of the decline in the growth rate of content spending, the growth rate of depreciation, the largest item in the company's COGS, will also fall. According to our estimates, the figure will decrease from 44.4% of revenue to 41.3% by 2025 due to a more modest spending growth rate.

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Thus, we expect GAAP operating income margin to increase by ~90 bps in 2023 (given the continued impact of the strong dollar exchange rate with weakening starting in Q3), and the figure increase by 2025 by 580 bps.

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We project FCF to be about $2.7 bn in 2023 and $3.5 bn in 2024, but the forecast could be affected by the difference in the effective tax rate for Netflix as well as a $300 mln variance in expected content spending (we project a budget of $17.3 bn compared to the management expectations of $17 bn).

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Based on our assumptions, we are remaining the rating at BUY.

Invest Heroes

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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