I don’t know if anyone’s really noticed, but Netflix had a pretty great third quarter, thank you very much. The streaming platform added 2.41 million subscribers when it only expected 1 million. It also beat analysts’ financial expectations, with $7.93 billion in revenue rather than $7.85 billion.
Plenty has been written about Netflix’s good results, how much it has to do with its content strategy and how it compares to rivals like Disney+. But for this column, we’re more interested in how the markets reacted: with a virtual clap.
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No longer priced-in
If you have been following quarterly earnings from public tech companies like The Exchange has, you may remember that not so long ago, outstanding growth was met with little more than a shrug. Why? Because in market parlance, it was already “priced-in.”
Indeed, Netflix shares jumped 14% in after-hours trading and are currently trading at a price they hadn’t reached since late April of this year. Of course, optimistic predictions for Q4 likely helped, but it also says a lot about how markets now react to good news.
In layman’s terms, shareholders didn’t expect anything less than the rocket-ship trajectory that warranted huge multiples in the first place — and there was no reward for meeting their expectations.
The corollary was that falling short of forecasts was strongly sanctioned, even if growth was still pretty strong in absolute terms.
Having failed to meet its own predictions in the first quarter, Netflix learned the hard way that in current times, it is probably better to underpromise and overdeliver. It did in the second quarter and won back the favors of the markets: When its subscriber loss was smaller than its weak outlook anticipated, its shares jumped.
Despite the two quarters of investor favor, Netflix, it turns out, would like everyone to pay less attention to its subscriber number as an indicator of performance. Starting with Q1 2023, the company announced, it will stop providing subscriber forecasts.
Deemphasizing subscriber count
If Netflix can argue that paid membership isn’t the key metric by which it should be evaluated, it is because it has more arrows in its quiver, all of which contribute to its main key performance indicator: revenue.
“As discussed in previous letters, we are increasingly focused on revenue as our primary top line metric. This will become particularly important heading into 2023 as we develop new revenue streams like advertising and paid sharing, where membership is just one component of our revenue growth,” the company wrote to its shareholders.
We already knew that advertising was in the cards for Netflix, with an ad-supported tier set to launch in 12 markets in November. But in its Q3 earnings, we tied the loop back to revenue expectations, as the company “believe[s] that more choice, especially for more price-conscious consumers, will translate into meaningful incremental revenue and operating profit over time.”
So-called “paid sharing” is more mundane but also goes to show that now isn’t a good time for revenue leakage — and Netflix obviously isn’t too keen on password sharing. After experiments to offer higher-priced shared subscriptions in some countries, Netflix plans to roll this out “more broadly starting in early 2023” while making it easier to “move out” of a shared account.
Earnings disclosure aside, we also learned more about Netflix’s plans at TechCrunch Disrupt. Netflix’s VP of Gaming, Mike Verdu, said the company is “seriously exploring a cloud gaming offering.” How much and when it would contribute to revenue remains to be seen, but it is still another argument in favor of deemphasizing paid membership as a metric.
It is too early to tell how things will turn out for Netflix in upcoming quarters, but it made us more curious about Q3 earnings season and the surprises it might bring. How many other tech companies will manage to both announce some good results and get rewarded for it?