3 Pleasant Surprises Netflix Just Gave Investors

Netflix (NASDAQ: NFLX) shareholders haven’t had much to celebrate in 2022. The stock slumped roughly 70% following a tough series of earnings reports that had investors questioning whether the streaming video-subscription business had lost its growth mojo, with earnings trends next on tap to worsen.

Some of those fears were overblown.

Netflix on Tuesday announced second-quarter earnings results that contained several pieces of good news about the business. Sure, revenue growth is still hitting a wall. But subscriber trends are back in positive territory, and Netflix’s broader growth model is anything but broken.

Let’s take a look at three bright spots from this latest earnings report.

1. Management has a better grip

One of the most jarring aspects of the last few earnings reports was the fact that co-CEO Reed Hastings and his team seemed unclear about why the business was suddenly losing subscribers. First, executives blamed a pull-forward effect from the earlier days of the pandemic. Management then listed several factors, including competition, password sharing, and slowing demand for smart TVs.

This week’s report featured a refreshing dose of certainty. “We’ve now had more time to understand these issues,” Hastings said in a letter to shareholders, “as well as how to best address them.” The path forward involves improving the content catalog, the streaming experience, and the marketing and pricing approaches .

The good news is that this strategy is more of the same types of initiatives that Netflix has been achieving for the past decade. In other words, the core growth model is intact.

2. Binging content still works

Netflix raised eyebrows when it decided to break from its traditional all-at-once content release schedule to stagger the availability for the new season of Stranger Things. Investors worried that this shift was another indication that its competitive edge was weakening as it was forced to adopt competitors’ strategies.

The company isn’t changing its brand, though, and plans to keep releasing almost all of its series at one time. Netflix’s original content continues to set viewership and engagement records and is making a huge cultural impact. Stranger Things‘ success was evidence, Hastings said, of the power of Netflix’s “binge [versus] one week at a time release strategy.”

3. The steady outlook

Management’s Q3 outlook describes a strong, stable business. Subscriber gains will return, the company said, after falling for two consecutive quarters. Revenue growth will land at roughly 12% after accounting for currency-exchange swings, compared to 13% this past quarter. Netflix has said in the past that sales gains of around 20% year over year represent an attractive goal for the business.

Operating profit margin will stay at about 20% of sales, too, consistent with management’s prior forecast. Together, these updates suggest that Netflix is shifting back into offense mode after stumbling badly over the last six months.

It might be hard to accelerate subscriber growth over the next few quarters due to competition and a potential economic slowdown. But Netflix also enjoys competitive advantages that it didn’t have a few years ago.

It is cash flow positive, generates over $30 billion in annual revenue, and has a big catalog of global hit series and movies. Investors shouldn’t ignore the value of those assets, which position Netflix as the leader in an on-demand entertainment industry that’s likely to grow for many more years.

Demitri Kalogeropoulos has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.

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