{"id":4300,"date":"2023-10-22T15:06:46","date_gmt":"2023-10-22T15:06:46","guid":{"rendered":"https:\/\/infundpros.com\/news\/netflix-q3-shows-the-power-of-companys-licensed-content-nasdaqnflx\/"},"modified":"2023-10-22T15:06:47","modified_gmt":"2023-10-22T15:06:47","slug":"netflix-q3-shows-the-power-of-companys-licensed-content-nasdaqnflx","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=4300","title":{"rendered":"Netflix: Q3 Shows The Power Of Company\u2019s Licensed Content (NASDAQ:NFLX)"},"content":{"rendered":"
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Investment Thesis<\/strong><\/h2>\n

The last time I wrote about Netflix, I mentioned how the actors\u2019 and writers\u2019 strikes were unlikely to have an adverse impact on the company relative to its peers. In this article, I discuss the company\u2019s Q3 performance and argue why moves such as price increases and increased push towards animated movies, demonstrate the company\u2019s ability to grow even in a challenging environment.<\/span><\/p>\n

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A Snapshot of Netflix Q3 Earnings<\/strong><\/h2>\n

Netflix had a decent quarter with revenues coming in at $8.54 billion, up 8% Y\/Y, and beating estimates by $1.59 million. Q3 EPS came in at $3.73, beating estimates by $0.25. Subscriber growth was the theme of the quarter, as the company looks its password-sharing crackdown to the next level, with net new subscriber additions coming in at 8.8 million, significantly exceeding expectations and comfortably beating the 2.4 million net-adds during the same period last year.<\/p>\n

The company also managed to generate operating margins of 22.4% on account of strong revenues and content timing.<\/p>\n

Management also provided strong guidance, with fourth quarter revenues now expected to come in at $8.7 billion, up 12% Y\/Y on a currency-neutral basis, and FY23 operating margins expected to come in at 20%, the upper end of the earlier forecast.<\/p>\n

Actor Strikes Not Having The Impact Initially Feared<\/strong><\/h2>\n

Although the writers\u2019 strike has thankfully come to an end, the actors\u2019 strike rages on, which is having an adverse impact on studios and streamers alike. However, thanks to NFLX\u2019s astute licensing agreements, these strikes are not having as much of an impact as initially feared. For instance, according to NFLX management, based on data from Nielsen, the legal drama Suits<\/em>, which NFLX has licensed for streaming, broke viewing records in July and generated 1 billion of viewing hours for the company globally. This is despite the fact that the show wrapped up in 2019 and was also available on other streaming devices prior to NFLX licensing it.<\/p>\n

Then there\u2019s the company\u2019s move into animated movies, which are protected from the strikes. During the quarter, the company entered into a multi-year agreement with Skydance Animation, under which, Skydance will develop animated movies for NFLX starting in 2024. Furthermore, the company has already lined up two animated movies, Leo starring Adam Sandler and the sequel to the global superhit, Chicken Run<\/em>.<\/p>\n

A combination of NFLX\u2019s licensing content and animated movies should protect the company from the actors\u2019 strike, which doesn\u2019t appear to have an end in sight. In addition, the final season of The Crown<\/em>, and the reality competition show Squid Game: The Challenge<\/em>, should also drive user engagement.<\/p>\n

Price Increases Should Buy Netflix Time to Optimise Its Ads Business<\/strong><\/h2>\n

One of the key highlights from NFLX\u2019s Q3 was the company\u2019s plans to raise prices for some of the tiers in select countries. While the company\u2019s ads-tier prices will remain unchanged, the Basic and Premium tiers will see their prices increase in the U.S., U.K., and France. The success of the company\u2019s password sharing crackdown could be a major factor behind this move, although the management didn\u2019t detail the exact reasons behind the move.<\/p>\n

The price increases should also allow the company more time to optimise its ad-business. While the company\u2019s ads business had a decent performance in Q3, with a nearly 70% increase in ads membership, and ads memberships now account for nearly 30% of new sign-ups. While this is a decent start, management did mention that ads business is not going to be material for FY23 and that their immediate priority is to optimise this business so that \u201cNetflix becomes an essential buy for advertisers.\u201d <\/em>The management also announced that they are planning to invest in their own sales team and technical infrastructure. The company also replaced Jeremi Gorman with company veteran Amy Reinhard as the new ad chief.<\/p>\n

So, while the ads business is likely to take longer before it starts having a material impact to the business, the price increases should help the company to generate meaningful profits in the meantime.<\/p>\n

Netflix Reminds Investors About its Gaming Ambitions<\/strong><\/h2>\n

Finally, NFLX also reminded investors during the quarter about its ambitions to succeed at gaming. The company announced that it has plans to release games based on popular shows such as Squid Game and Wednesday. Furthermore, reports suggest that the company is also considering licensing Grand Theft Auto<\/em> from Take-Two Interactive. Next month, Netflix subscribers will also be able to play the popular strategy game Football Manager 2024 Mobile edition.<\/p>\n

Based on its plans, it is clear that the company is planning to employ the same strategy that it uses for its content library, for gaming as well. While this is likely to be a more challenging endeavour, given that NFLX will have to compete with the likes of Microsoft (MSFT) after it closed its $75 billion acquisition of Activision Blizzard, the updates provided by the company does indicate that the company is taking gaming seriously and sees it as a meaningful revenue diversifier in the coming months.<\/p>\n

Valuation<\/strong><\/h2>\n

<\/span><\/p>\n\n\n\n\n\n\n\n\n
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Forward P\/E Multiple Approach<\/p>\n<\/td>\n

 <\/td>\n<\/tr>\n<\/thead>\n
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Price Target<\/p>\n<\/td>\n

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$460.00<\/p>\n<\/td>\n<\/tr>\n

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Projected Forward P\/E Multiple<\/p>\n<\/td>\n

\n

33x<\/p>\n<\/td>\n<\/tr>\n

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PEG Ratio (NTM)<\/p>\n<\/td>\n

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1.32<\/p>\n<\/td>\n<\/tr>\n

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Projected Earnings Growth<\/p>\n<\/td>\n

\n

25%<\/p>\n<\/td>\n<\/tr>\n

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Projected FY24 EPS<\/p>\n<\/td>\n

\n

$13.95<\/p>\n<\/td>\n<\/tr>\n<\/table>\n

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