Netflix Stock Soars as Subscriber Growth Tops Expectations

Netflix shares were trading sharply higher after the streaming giant posted better-than-expected subscriber growth for the third quarter.

The company added 2.41 million net new subscribers in the quarter, beating its own forecast of 1 million additions. Netflix (ticker: NFLX) said it expects to add another 4.5 million subscribers in the December quarter.

Netflix stock jumped 14% in late trading to $274.60.

The streaming company posted third-quarter revenue of $7.93 billion and earnings of $3.10 a share, ahead of the company’s forecast of $7.84 billion and $2.14 a share. For the fourth quarter, Netflix projects revenue of $7.78 billion and earnings of 36 cents a share.

Revenue in the latest quarter was up 6% but would have been 13% higher in constant currency, as the strong dollar took a considerable toll on reported results. The company said the revenue increase reflected a 5% increase in average paid memberships versus a year ago and a 1% rise in average revenue per membership.

The company said revenue was up 19% in the Asia-Pacific region adjusted for currency; 13% in the Europe, Middle East and Africa region; and 19% in Latin America. For the U.S. and Canada, revenue was up 12%, with paid subscribers up 100,000. The bigger subscriber increase was in the Asia-Pacific region, where the total increased 1.43 million. The company added 570,000 subscribers in EMEA, and 310,000 in Latin America.

Operating margin was 19.3%, falling from 23.5% a year ago and 19.8% in the June quarter, declines the company said were due to foreign exchange factors. Net income of $1.398 billion includes a $348 million noncash change tied to the company’s Euro-denominated debt.

The company expects an operating margin of 4% in the fourth quarter, down from 8% a year ago, due to both foreign exchange rates and higher content and marketing costs. Netflix said that the strong dollar will reduce full-year revenue by about $1 billion, with about an $800 million reduction in operating income.

In one surprise development, Netflix said that starting next quarter, the company would no longer give guidance on paid memberships—the metric that has been most important to investors in recent quarters. The company will still report quarterly subscriber data, just not forward-looking guidance on the metric.

The company said it would continue to provide guidance on revenue, operating income, operating margin, net income, earnings per share, and shares outstanding. Netflix said that with the addition of new revenue streams such as advertising and paid sharing, revenue growth will be a better measure of the company’s growth.

The company also provided a brief update on its strategy for reducing account sharing by people not in the same household. Netflix said that starting in early 2023, it will offer people now using borrowed passwords a way to transfer their Netflix profile into their own account. The company will also offer sharers easier ways to manage devices and to create sub-accounts to pay for family or friends.

Netflix also provided an update on its gaming service, which it launched almost a year ago. There are now 35 games on the service, the company said, and there are “encouraging signs” that gameplay leads to higher subscriber retention rates. The company said there are 55 more games in development, some based on Netflix video content.

Last week, Netflix unveiled the details of its new ad-supported subscription tier. Starting Nov. 3, the company will offer consumers the option to pay $6.99 a month for “Basic with Ads,” which will include four to five minutes of advertising per hour for streaming movies and TV shows. The new service is $3 cheaper than the company’s Basic plan, which is $9.99 a month, and a dollar a month cheaper than the new ad-supported tier on Walt Disney’s (DIS) Disney+.

Netflix said it doesn’t expect a material contribution from the new ad-supported tier in the fourth quarter, noting that it expects to grow membership in that plan “gradually over time.” Netflix added that the reaction from advertisers so far has been “extremely positive.”

Netflix also used its quarterly letter as a forum to poke at the competition, noting that its rivals together will have more than $10 billion in operating losses this year, versus a projected $5.4 billon in operating profit for Netflix. “Building a large, successful streaming business is hard,” the company said.

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