Netflix Q2 - In line with expectations

Netflix released results last night which were pretty much in line with expectations. The share price is up over 60% this year, so the market was looking for strong numbers. Revenues for the quarter grew 2.8% to $8.19 billion while net subscriber additions were 5.89 million - comfortably beating estimates of 1.8 million, very encouraging. The extra subscribers did come at a cost, with average revenue per user (ARPU) of $11.55 below the expected $11.76. Despite the ARPU miss, margins were better than hoped for.

The password crackdown has worked well in all 100 countries where they have implemented it and sign-ups have surpassed cancellations. By the end of this quarter, every single region will have the changed policy. The advertising business has also had a good start, although that operation is still too small to move the needle. Netflix plans to drop the cheapest ad-free package. So either you go premium or you suck up the ads.

This business has matured somewhat in developed markets but we still see good upside from its ability to squeeze overall ARPUs higher. The full effect of the password-sharing crackdown and the advertising package will only be seen in time. Subscribers are used to inflation-related price hikes.

Netflix shares only trade at 23 times 2025 earning expectations, even after the recent rally. We advise you to hold the shares, there is more meat on this bone.