Netflix picks up a series of subscriber dips and beats earnings, while stock jumps 15%

Netflix Inc. added. More than 2 million subscribers in the third quarter after faltering in 2022 with two consecutive quarterly declines, a rebound that sent shares up more than 15% in after-hours trading on Tuesday.

Netflix NFLX,
-1.73%
It reported net profit of 2.41 million subscribers in the third quarter, while analysts averaged 1.1 million net additions, according to FactSet. It comes after a drop of nearly 200,000 subscribers in the first quarter and nearly a million in the second quarter, prompting the company to plan massive changes, including a cheaper ad-supported broadcast tier due to arrive in the fourth quarter.

In a letter to shareholders, Netflix executives said they expect 4.5 million new subscribers to join in the fourth quarter, with revenue expected to grow to $7.78 billion from $7.71 billion a year ago. Analysts, on average, estimated revenue of $7.97 billion and a combined net gain of $4 million for the fourth quarter, according to FactSet.

“After a difficult first half, we believe we are on track to accelerate growth,” the executives wrote in the letter.

The news pushed Netflix shares up about 15% in after-hours trading after the results were released, after closing down 1.7% at $240.86. An extension of the subscriber slump has weakened shares of Netflix, which are down 60% so far this year, while the broader S&P 500 index SPX,
+ 1.14%
It has decreased by 22.8%.

The downturn of the live video streaming giant after a rush that fueled the pandemic has intensified pressure from rival streaming services at Walt Disney Co. DIS,
+ 1.18%And the
Apple Inc. AAPL,
+ 0.94%And the
Amazon.com Inc. AMZN,
+ 2.26%And the
Warner Bros. Discovery Inc. WBD,
+ 4.55%And the
Comcast Corp. CMCSA,
-0.23%
and Paramount Global Para,
+ 1.56%.

That hasn’t stopped Netflix executives from taking a stand on streaming rivals on profitability. “Our competitors are investing heavily to attract subscribers and engagement, but it’s hard to build a large, successful streaming business — we estimate that they are all losing money, with combined operating losses in 2022 of over $10 billion, versus Netflix’s annual $5-6 billion run,” the executives said. At Netflix in a contributor letter.

The dramatic shift in the video-streaming climate, in which Disney overtook Netflix as the market leader in July, has radically transformed Netflix. Last week, the company announced the long-awaited ad-supported tier, which debuted on November 3 in the US for $6.99 per month. Another 11 countries, including Canada and Mexico, will have the service by November 10. The company has also pledged to crack down on shared accounts, and is pushing ahead with gaming.

The ad-supported tier directly acknowledges competition and the need to “adapt to the new normal of the streaming landscape,” Ross Bennis, analyst at Insider Intelligence, said in a note late Tuesday.

More info: Netflix has lost the streaming crown to Disney. Here’s how executives expect to get it back.

Netflix reported third-quarter earnings of $1.4 billion, or $3.10 per share, down from $3.16 per share a year ago. Netflix’s revenue improved to $7.93 billion in the quarter from $7.48 billion in the same period last year, but it missed dwindling expectations. Analysts polled by FactSet had expected earnings of $2.14 per share on sales of $7.84 billion, estimates that have fallen in recent days.

Tuesday’s results come after some serious self-reflection among Netflix executives about how to stem the drop in traffic among subscribers that led to the cancellation. Co-CEO Reed Hastings consulted with employees to find ways to get subscribers to visit the platform more frequently, according to reports from the Wall Street Journal and Bloomberg News.

One such strategy is to crack down on multiple users sharing the same account. In the contributor’s letter, Netflix said it has “taken a deliberate approach to monetizing account sharing and will begin to roll this out more broadly starting in early 2023.”

After hearing consumer feedback, we will provide borrowers with the ability to transfer their Netflix profile to their own accounts, and for participants to more easily manage their devices and create sub-accounts (“Additional Member”), if they “want to pay family or friends,” the message said. In countries with our low-priced, ad-supported plan, we expect the option to transfer a profile for borrowers to be particularly popular.”

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