Netflix earnings showcase strength as the rest of the media industry struggles

The main takeaway from Netflix’s second quarter earnings is business is … good. That’s right. A large media and entertainment company’s fundamental business is just fine. Netflix added 5.9 million subscribers in the quarter, a sign that its two primary 2023 initiatives — cracking down on password sharing and launching a cheaper $6.99 per month advertising tier — are bringing in new subscribers. Netflix added 1.2 million subscribers in the United States and Canada in the quarter — its largest regional quarterly gain since 2021. This is not the story for the rest of the media industry. Disney and Warner Bros. Discovery have spent the year slashing content from its streaming services to avoid paying residuals and saving on licensing fees. Both companies have laid off thousands of employees over the past 12 months to boost free cash flow. Paramount Global and Comcast’s NBCUniversal both said 2023 will be the biggest annual loss ever for their streaming businesses. Meanwhile, Netflix boosted its free cash flow estimate to $5 billion for the year. Previously, the company had estimated it would have $3.5 billion, but the actors and writers strikes will cut down on content spend. That means Netflix will actually have even more cash than it previously expected. Next quarter, Netflix forecast subscriber gains will be about 6 million again. The company said revenue will accelerate in the second half of the year as it sees “the full benefits” of its password-sharing crackdown and steady growth in its ad-supported plan.

Back on track

Last year, Netflix’s valuation dropped by 60% as streaming subscriber growth came to a halt. The company spent ample time on earnings conference calls focusing and explaining its new video game business, introduced in the middle of 2021, to help start a new growth narrative. This quarter’s shareholder letter barely even addresses video games. Why? Because unlike the rest of the media industry, Netflix doesn’t need a new narrative. The old one still works. Streaming is growing. Cash piles are rising. Advertising has investors excited. Netflix has a steady pipeline of international content and a deep library to weather an extended writers and actors strike. “The lack of references to video games in its shareholder’s letter suggests advertising is the shiny object that most commands the company’s focus,” said Ross Benes, an analyst at research firm Insider Intelligence. Netflix shares dropped 5% after hours. That’s more a symptom of profit taking after Netflix’s big gains this year (up more than 62% as of Wednesday’s close) than anything to be angry about in its initial quarterly numbers. After a precipitous fall last year, the company is back on track. And it didn’t even need to switch trains.