Netflix Stock to New Records Ahead of Q3 Earnings

Netflix in Strong Position but Pitfalls Could Lay Ahead

After a difficult period, Netflix implemented two critical strategic shifts, with the new password sharing policy that rolled off a little over a year ago and the ad-supported tier launched in late-2022. These initiatives worked out well for the company, boosting its user base and financials and allowing it to reassert is dominance in the streaming market. The stock has benefited as a result, gaining around 350% from the 2022 multi-year low.

The latest report offered further reason for optimism as revenues accelerated 16.8% y/y in the second quarter and the fastest pace in three years ^[1]. The stock added another 5% in third quarter and extends its gains this month, reaching new records. Another strong report on Thursday could set the stage for greater advance, but guidance will also be important and pitfalls lay ahead.

The growth runway from the two strategic initiatives is getting shorter, as executives project new record revenues of $9.727 billion, but that would mean growth of 13.9% y/y and mark the first deceleration on more than a year.

The new tier that includes commercials is crucial for the firm's financials, as it creates an additional revenue stream and allows it to look past subscriber number, which it will stop reporting next year from next year on. Being the streaming leader, with strong engagement and retention, it is an appealing option for advertisers, but it is still a small player compared to legacy media giants like Disney.

It is also entering the increasingly important live sport segment, with December's two NFL matches standing out, but executives don't look inclined to go all in on live sports. That means they may have to get creative in order to draw advertisers and a free-version could work, so it will interesting to see if executives consider such options.

Engagement is also more important than ever in the new ad-inclusive era, but the firm's latest report showed that viewership was largely flat in H1 2024 compared to a year ago ^[2]. This is concerning given the fact that the userbase was 16.5% bigger.

Netflix is going through a great period, but the positive impact form it strategic changes begins to fade and challenges are starting to appear. As a result we could see pressure on NFLX.us, especially if the firms fails to deliver on Thursday. On the technical front, the RSI has not followed the stock higher, in a divergence that could lead to pullback towards the EMA200. However deeper correction that would pause the bullish bias does not look easy, as Netflix is well positioned to maintain its leadership.