Strong Q1 Across the Board
Netflix (NFLX) posted strong results across the board, with revenue growth of 13% year-over-year (16% FX neutral), and even more impressive operating income rising 27% year-over-year. Q1 marked the first quarter in which the company no longer provides subscriber metrics as it focuses more on engagement metrics. The company offered strong Q2 guidance above the Street but maintained its full-year guidance, even though it continues to track ahead. The company bought back an impressive $3.5 billion in stock, the most it has ever purchased in a quarter, demonstrating its confidence in both near- and long-term business trends.
Guidance Strong as Price Increases Continue to Flow Through
Netflix guided Q2 revenue to accelerate to 15% (17% FX neutral) year-over-year growth and operating margins of 32%, a 400-bps year-over-year increase. Note that Q2 will reflect a full quarter of the price increases implemented in the US, UK, Argentina, and France. The company reiterated its full-year guidance of $43.5-$44.5 billion in revenue and a 29% operating margin. They are tracking above the midpoint of the guidance, and while content expenses will increase in the second half of the year, it is clear that the guidance is quite conservative.
Strong Cash Flow Generation and Capital Allocation Discipline
The company generated $2.5 billion in free cash flow and reiterated its plans to generate $8 billion for the year. When asked on the call, they stated that the vast majority of the free cash flow will be redeployed as share buybacks. It is important to note that they have $13.6 billion remaining on their share buyback authorization.
Lower Ad Tier Provides Offset if Recession Hits Consumers
There was some worry about a weak upfront ad market, but management dispelled that, stating that they have seen no signs of softness or positive signs heading into the upfronts. While management made a strong case that streaming entertainment subscriptions like Netflix are relatively recession-resilient, the lower ad tier, starting at $7.99 monthly, would seem a good option for hard-hit consumers in a recession.
Netflix Ads Suite was rolled out on April 1st in the US, with other markets to follow. Programmatic has now been launched in all geographies. These ad capabilities allow the company to provide more capabilities to advertisers to access the Netflix user base in a much more targeted fashion. Netflix expects its ad revenue to double in 2025.
Safe Stock with Derisked Numbers, Strong Buyback and No Tariff Risk
Earlier in the week, word leaked that the company was targeting to double revenue and triple operating income by 2030. Strong revenue growth and even better margin expansion like this is music to investors’ ears. With a strong Q1 and Q2 progressing and a non-stretched valuation at 30x EV/EBITDA 2025, Netflix will be a name that investors hide in as they are not exposed to the vagaries of the trade war.
