Netflix Q1: Large Paid Net Adds Beat, Yet Important Key Metrics Dropped Starting in 2025

Posted on April 19, 2024June 30, 2026 by io-fund

Netflix logged its largest EPS beat since Q3 2022 with phenomenal 83% YoY EPS growth, as it reported an acceleration in both revenue and global membership growth in Q1. This was driven by strong paid net adds of 9.33 million in the quarter, far above consensus estimates for 4.11 million net adds.

However, Netflix guided Q2 revenue slightly below consensus, though it still points to revenue acceleration continuing for at least one more quarter. In addition, the fiscal year revenue growth guide was a bit soft and hinted at a back half deceleration.

Netflix also announced a change in its reporting metrics. Starting next year in Q1 2025, Netflix will no longer report quarterly membership numbers and ARM, though it will continue to report revenue by region. In addition, Netflix will begin guiding full-year revenue numbers and provide updates on “major subscriber milestones” as they occur. The markets do not like changes like this, and it likely contributed to the weak price action. We detail what we think is the motivation behind these key metrics being dropped below in the Q&A section.

Revenue and EPS:

Revenue of $9.37 billion beat estimates by less than 1%, representing YoY growth of 14.8%. This was Netflix’s highest revenue growth since Q4 2021.
EPS increased more than 83% YoY to $5.28 versus consensus of $4.54, beating estimates by 16.8%. Netflix reported $2.332 billion in net income, more than 18% higher than mgmt’s guide for $1.976 billion.
For Q2, Netflix guided revenue of $9.49 billion, representing YoY growth of 15.9%. This was slightly below consensus of $9.53 billion for 16.3% YoY growth.
Netflix guided EPS of $4.68 in Q2, representing YoY growth of more than 42%.
For the full year, Netflix called for “healthy” revenue growth between 13% to 15%, versus analyst estimates for nearly 14.4% growth. This is construed as a miss at the midpoint. It also indicates a lower rate in H2 since Q1 and Q2 were growth rates of 15% to 16% growth.

Margins:

Netflix reported an operating margin of 28.1% in Q1, its highest ever as margins continue to expand across the board. Netflix boosted its full year operating margin guide by 100 bp to 25%, which would represent a solid 440 bp improvement from 20.6% in 2023.

Gross margin was 46.9%, a 580 bp YoY expansion as gross profit rose nearly 31% YoY.
Operating margin was 28.1%, a 710 bp YoY improvement as Netflix reported 54% growth in operating income. Timing of content spend and the higher-than-anticipated revenue also aided this operating margin expansion.
Net margin was 24.9%, a 900 bp YoY expansion due to the strong 79% YoY increase in net income.
Operating margin for Q2 was guided at 26.6%, a 410 bp YoY expansion though slightly 150 bp lower sequentially. For the full year, Netflix boosted its operating margin guide to 25% from a prior view for 24%, suggesting that while margins are strong in 1H, a deceleration in 2H to the low-20% range is likely.
Net margin for Q2 was 21.7%, a 610 bp YoY improvement, but again a 320 bp sequential decline.

Cash and Debt:

Operating cash flow in Q1 was $2.21 billion for a margin of 23.6%. This is Netflix’s second-highest quarterly OCF margin and only its third OCF margin to be above 20%.
Free cash flow was $2.14 billion for a margin of 22.8%. Similar to OCF, this was the second-highest quarterly FCF margin and the third above 20%. Despite the strong FCF number, Netflix maintained its $6 billion guide for the full year.
Cash and short-term investments totaled $7.04 billion, while gross debt totaled $14.0 billion, as Netflix paid down $0.4 billion in senior notes in the quarter.

Netflix reported a cash spend of $17 billion. Content spend is often asked about given the budget can be quite large for Netflix. Management stated: “So we believe we can manage to that roughly 1 to 1 of cash content spend relative to expense on the P&L.”

The company repurchased $2 billion shares this quarter.

Key Metrics:

Paid Net Adds Blow Past Consensus

Though we had noted in our pre-earnings report that management’s commentary pointed to a wide possible range for net adds (between 2M and 13M), Netflix reported paid net adds at the high end of that range at 9.33 million. This compared to just 4.11 million expected by some analysts, and some as high as 5.11 million from TD Cowen’s bullish view – essentially, Netflix blew it out of the water with paid net adds in the quarter.

This pushed global paid memberships up to nearly 270 million, or a YoY increase of 16%. This is the fastest growth in global paid memberships since Q4 2020 – Netflix is one of the few, if only, pandemic beneficiaries to return to pandemic growth rates. This also marks a sharp acceleration from less than 5% growth in Q1 last year.

Breaking down paid net adds geographically shows that the growth was well rounded. EMEA saw paid net adds of over 2.91 million, while UCAN added 2.53 million and APAC nearly 2.16 million. Here’s a snapshot of the regional highlights:

EMEA has reported >2 million paid net adds for four consecutive quarters. Paid net adds in the region totaled nearly 8 million in the past two quarters.
APAC has reported >2 million paid net adds for two consecutive quarters, and more than 5 million paid net adds in the past two quarters combined, for total membership growth of nearly 12% since Q3 2023.
UCAN’s 2.53 million paid net adds were more than 40% of 2023’s paid net adds for the entire year.

For Q2, Netflix guided paid net adds to be down sequentially, following seasonal trends. Given the wide range of possible outcomes again, this will be an important metric to track next quarter.

ARM: 1% YoY Increase

We had noted that ARM would be one of the more important metrics coming out of this report, on expectations for an inflection back to growth in 2024.

ARM increased 1% YoY in Q1, and 4% on an FX neutral basis, compared to 1% on a reported and FX neutral basis in Q4. Management expects ARM to increase YoY in Q2.

This growth in ARM was driven primarily by UCAN, which saw ARM increase 7% YoY to $17.30.
EMEA’s ARM was flat YoY, breaking four quarters of declines on an FX neutral basis.
LATAM continued to face headwinds from the major devaluation of the Argentine peso, reporting a (4%) YoY decline in Arm but a 16% increase on an FX neutral basis.
APAC provided the largest headwind to ARM, with a (8%) YoY decline or (4%) on an FX neutral basis.

Earnings Call

Cutting Off Password Sharing Will (at some point) Reach Saturation

One analyst is probed into how far along Netflix is into cutting password sharing off. Management did not give a straight forward answer but this is important to consider if management is wanting to phase-out key metrics that may have been bolstered by this. Typically dropping key metrics is a flag, so analysts were trying to figure out indirectly what the cause could be.

Our next question comes from Alan Gould of Loop Capital. Which inning are we in with respect to enforcing paid sharing? Two years ago, you said 100 million subscribers were sharing passwords with 30 million in UCAN. How many do you estimate still borrow passwords? And I'll turn the floor over to Greg to answer that question.

The answer was long but vague, and offered no transparency into the potential saturation of cutting-off PW sharing: “I think worth noting that while we're fully anticipating continuing to grow subs, the overall business growth now has extra levers and extra drivers like plan optimization, including things like extra members, ads revenue, pricing into more value, which is important. So those levers are also an increasingly important part of our growth model as well.”

Another analyst snuck this in and it was not refuted. It’s subtle that management didn’t state otherwise but important to note. “Could you please provide an update on engagement trends now that paid sharing is mostly behind you? So I'll kick it over to Ted first, and Greg, you can feel free to add on.”now that paid sharing is mostly behind you? So I'll kick it over to Ted first, and Greg, you can feel free to add on.”

On that last question, management did mention that cutting off password sharing will weigh on viewing metrics:

“As we have said, due to the work that we've been doing on password sharing, we're essentially cutting off some viewers who are not payers, and therefore, we're going to lose some viewing associated with that. So when you see our next engagement report, you are going to see some impact to our overall absolute view hours as a result of that.”“As we have said, due to the work that we've been doing on password sharing, we're essentially cutting off some viewers who are not payers, and therefore, we're going to lose some viewing associated with that. So when you see our next engagement report, you are going to see some impact to our overall absolute view hours as a result of that.”

Therefore, if password sharing becomes saturated, this could lead to paid net adds potentially flatlining as its been the primary growth lever for some of these knockout reports on paid net adds.

Demand Problem on Ad Tier

In the call, management pointed to there not being enough demand for the ad tier, which means not enough advertisers. This may change next month in the upfront season where top tier content providers court advertisers for upfront commitments in a highly publicized event, but for now, it’s creating a drag on ARM.

“In terms of how we're doing now relative to what we discussed when we first launched business, as Greg said, we've been growing our inventory at quite a fast clip. And so monetization hasn't fully kept up with that growth in scale and inventory as we're still early in building out our sales capabilities and our ad products. But that is an opportunity for us because this — we're still a very premium content environment, very highly engaged audience that's at an increasing scale. So our CPMs remain strong.

And we're building out our capabilities, as Greg talked about. So the revenue is going to follow engagement over time, and it's already kind of growing nicely, which is great just off a small base. So then really, as Greg said, what that means for ARM is right now, it is a bit of a drag on our ARM because of we're kind of under-monetizing relative to supply.”what that means for ARM is right now, it is a bit of a drag on our ARM because of we're kind of under-monetizing relative to supply.”

Therefore, the ad tier seeing a lag on demand could be the motivation for dropping ARM as a key metric come Q1 2025.

Lower Revenue Guide

The revenue guide being slightly lower at the midpoint was addressed on the call in terms of why there may be a slowdown by one or two points. Here is what management stated: “So our growth in the back half of '24 is really kind of comping off of those hard comps. And at the high end of our revenue forecast, our growth in the second half is consistent with our growth in the first half even with those tougher comps.”

The ARM in the UCAN region is a strong start as Netflix has recently raised prices in this region. EMEA may have broken it’s string of four quarters of decline due to increased prices in France and the UK being the remaining markets that saw price increases. However, it’s not going to be straight-forward ARM growth due to cutting-off password sharing leading to some lower priced tiers.

Per the call: “So mostly what you're seeing in our growth profile this year is the fact that we haven't taken pricing in most countries for the past 2 years really. And we also have some ARM kind of headwinds in the near term that you see in Q1. You'll probably see throughout most of this year, which is that, one, we have some — this plan mix shift as we roll out paid sharing. So it's — while it's highly revenue accretive, as you can see in our numbers, in our reported growth — strong reported growth in Q1 and outlook for the year, that – – as we spin off into new paid memberships, they tend to spin off into a mix of plan tiers that's a little bit of a lower price SKU than what we see in our tenured members […] And we're also growing our ads tier at a nice clip as you've seen and I'm sure we'll talk about. And monetization is lagging growth there.”

Conclusion:

This is a tough one because it’s a strong report at face value. This quarter was very impressive, and the nominally weaker full year guide feels a bit nit-picky to focus on. Overall, Netflix’s free cash flow guide of $6 billion and earnings growth over the next few quarters could sustain the stock, if needed. The company was wise to move toward efficiency and we have held the stock primarily for this reason as the foundation to our thesis while we participated in the speculative pivots of cutting off passwords and the ad tier. So far, one of those pivots has performed as planned (cutting of PWs) while the other pivot has been slow to monetize (the ad tier).

We are seeing important key metrics get dropped next year, which almost-always indicates an issue that management wants to get in front of. It’s interesting that Netflix rode out some tough quarters post-Covid with the pull-forward that occurred, yet kept these key metrics. In this case, it’s only natural to wonder if what’s ahead will be bumpier than the Covid pull-forward.

When you combine the fact that the key metrics could point toward the eventual saturation in cutting off password sharing coupled with a lag in demand on the ad tier, the next few quarters feel a bit like Russian roulette on when these two issues will intersect. It could be all blanks, and the juggernaut could march along and be rewarded especially for the bottom line, or these two could intersect and create a drag on both paid net adds and ARM at the same time. We are weighing these scenarios and our decision will ultimately be communicated in how the I/O Fund manages the position.

Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.

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Apple’s Services Growth Flywheel Continues To Strengthen

Posted on November 21, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Nov 16, 2023,05:19pm ESTForbes Forbes on Nov 16, 2023,05:19pm EST

Apple’s Services segment was one of the brightest spots in a relatively in-line earnings report at the beginning of November, topping an $85 billion run rate as growth jumped back to the high double-digits after a string of single-digit growth. Services demonstrated that its growth flywheel continues to strengthen with multiple outlets of opportunity in sight — from AI, to further growth in the installed base, to price hikes across different Services bundles.

Services Growth Outpaces iPhone, Apple

Since fiscal 2018, Services has become increasingly important to both the top and bottom lines for Apple. The segment has seen its share of revenue rise from under 15% five years ago to 22.2% at the end of September. Since then, Services has seen its annual run rate increase from ~$40 billion to over $85 billion, on track to surpass a $100 billion run rate potentially as early as the second half FY24.

FY21 was a breakout year for Services – the segment recorded greater than 24% YoY growth and generated more than $10 billion in gross profit each quarter, as its gross margin neared 70%. Gross margin has continued to stay above the 70% range, rising as high as 72.6% in Q2 FY22.

Source: I/O Fund

FY23 ending in September saw a full year growth rate of 7.1% YoY for $85.2 billion outpacing both iPhone and company-wide growth, with Q4 being the strongest quarter of the fiscal year with a growth rate of 16.3% YoY. The I/O Fund recently covered Apple’s earnings report more in-depth following fiscal Q4 here.

Since FY18, Apple has grown revenue at a 7.6% CAGR, meanwhile, Apple’s company-wide gross profit has grown at a 10.1% CAGR over the same period with profits partly impacted by Services’ rising contribution and expanding margin.

Compared to Apple, Services is seeing revenue and gross profit grow at much quicker rates – more than 9 percentage points higher for both metrics. Since FY18, Services revenue has grown at a 16.5% CAGR, outpacing Apple’s 7.6% growth rate as well as the iPhone’s 4.0% CAGR, due to the unevenness in revenue in between upgrade cycles – iPhone delivered YoY revenue declines in FY19, FY20, and FY23.

Services’ gross profit has expanded at a 20.1% CAGR, rising around 150% since FY18, from $24.2 billion to $60.3 billion as gross margin has expanded 10 percentage points, from 60.8% to 70.8%. This strong revenue and gross profit growth over the past five years has seen Services gain importance to Apple’s margins and its bottom line.

Source: Apple

In FY18, Services contributed 23.7% of Apple’s gross profit, whereas today, Services contributes 36% of gross profit.

The breakdown looks like this:

As Services’ share of revenue rose from 15% to 22.2%, it helped pull Apple’s gross margin ~580 bp higher in just five years. Product gross margin – iPhone, Mac, iPad, etc. – increased just 210 bp, meaning this expansion in gross margin is primarily coming from Services.

FY21 was a breakout year for Apple’s gross margin, expanding from 38% to more than 42% because of that growth in Services. Apple is guiding for gross margin to expand further in fiscal Q1 next year, to the 45% to 46% range – an expansion of 200 to 300 bp YoY, with Services’ growth rate forecast to be in the high-teens again.

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Services Seeing Multiple Growth Outlets

Services growth has been broad based, with new revenue records across a range of different offerings, and the segment has multiple growth outlets to lever in the future, from growth in paid subscribers, AI, and price hikes.

CEO Tim Cook explained on Apple’s Q4 earnings call that the Services segment “achieved all-time revenue records across App Store, advertising, AppleCare, iCloud, payment services, and video, as well as the September quarter revenue record in Apple Music.” CFO Luca Maestri added that Services “reached all-time revenue records in the Americas, Europe and rest of Asia-Pacific and a September quarter record in Greater China.”

What is driving these record levels across multiple Services offerings and in every geography worldwide is solid growth in active devices and strong growth in paid subscriptions. Paid subscriptions have risen at more than 27% annually over the past five years to 1 billion by the end of FY23.

Source: APPLE

Apple has surpassed 2 billion installed devices, and “continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem.” Thus, the organic growth flywheel for Services remains soundly intact – growth in installed devices driving growth in paid and transacting accounts at a higher degree.

At the start of FY18, Apple reported that it had an installed active device base of 1.3 billion devices, meaning it had a ratio of about 0.18 paid subscriptions per 1 active device. Since then, installed devices have grown more than +50% to over 2 billion, while paid subscriptions have grown nearly +360% to almost 1.1 billion, or a ratio of about 0.5 paid subscriptions per active device.

Reaching new all-time highs in its installed device base signals further growth lies ahead for Services, especially as the ratio of paid subscriptions per active device continues to rise. Other outlets of growth arise from Apple’s recent price hikes and potential monetization opportunities from AI.

Additional Levers

Apple recently enacted some price hikes for News+, Arcade, and its One bundles, with the hikes ranging from $2/mo to $5/mo. As a whole, the price hikes could generate an additional ~$5 billion in annual revenue with just a 15% attach rate to Apple’s more than 1 billion paid subscriptions — however, the price hikes could incur a small amount of churn, among more price-sensitive consumers.

In terms of AI, Apple is not releasing any details about projects in development, though it is rumored that some of the AI products Apple is working on would improve Siri and Messages’ capabilities, or add features to Keynote, Pages, and Apple Music. Apple’s large language model ‘Apple GPT’ is reportedly under development, but a commercialization route is still undetermined. The next-generation of Apple’s software, iOS 18, macOS 15, and watchOS 11, are poised to bring AI features to Apple’s devices next year, as it works to catch up in the generative AI deployment race against OpenAI and Google.

For any of its AI products, there are three routes that could boost Services revenue – adding AI features for free in an aim to boost engagement across offerings, charging a subscription fee for AI features, or increasing prices of current bundles that incorporate AI. For example, if Apple charged for a stand-alone AI subscription at a $2.99/mo price point, it could rake in ~$10.8 billion in annual revenue at a 15% attach rate to its more than 2 billion active devices; boosting the prices of all of its subscription bundles by $0.99/mo could also add more than $10 billion annually.

In a previous Forbes article “AI Could Be Apple’s Next Chapter,” my firm pointed out that: “although Apple is tight-lipped about the progress of its AI projects, the so-called Apple GPT chatbot is rumored to be more powerful than Open AI’s GPT 3.5 model, according to The Verge. Apple is spending millions of dollars a day training the large language model Ajax on more than 200 billion parameters.”

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iPhone Demand Uncertain, China Risks Remain

Analysts have expressed concern over the holiday launch trajectory of Apple’s new iPhone 15, hinting that supply shortages, lower levels of consumer spending, and shorter wait times suggest weaker demand. The iPhone remains Apple's main source of revenue, and a conservative fiscal Q1 guide from the company along with heightened concerns over iPhone 15 demand add to risks that iPhone revenue growth in the near-term will remain depressed, after growing just +2.6% YoY in Q4.

Other concerns arise from Apple’s concentration in China, in regard to its iPhone supply base. Bank of America warned that Apple’s iPhone “supplier base remains largely in China,” which could “create many headwinds including around production, demand, [and] competition,” given that it is “hard to move all elements out of China.”

Services remains strong and a segment to watch, but we need the iPhone to participate and come in strong too, with a lingering risk to watch around China. Without the iPhone participating, Services is not enough to carry Apple’s stock alone, especially given its current valuation trading at levels hard to sustain.

Source: YCHARTS

Apple is currently trading at a 7.76x P/S ratio, above its 5-year median P/S ratio of 6.59x, with the 8.0x a level that Apple has struggled to hold on to since spiking to it in 2020. Apple is also trading at a nearly 28.8x forward P/E ratio, again another valuation level that it has struggled to hold on to – since late 2021, Apple has generally pulled back to below 24x forward P/E after trading above the 28 range.

Source: YCHARTS

However, another risk to watch is Alphabet’s antitrust trial, as it could have direct implications for Apple in the event of a negative ruling. Alphabet’s multi-billion dollar payments to Apple for Google to be the primary search engine on Safari across Apple’s devices is at the center of the trial, and that payment is rumored to be ~$19 billion this year – a key witness mentioned during the trial that Google is paying Apple 36% of search advertising revenue it generates via Safari. Should the scale of those payments constitute monopolization of the search market, Apple could be set to lose on a lucrative Services revenue stream.

Conclusion

Services is rapidly becoming one of Apple’s most important top-line segments, and arguably is the most important for Apple’s bottom-line, given its outsized role in boosting Apple’s gross margin. Organic growth has been a strong driver of Services’ +16.5% 5-year revenue CAGR and its +20.1% 5-year gross profit CAGR, both of which outpace Apple’s growth rates by more than 9 percentage points.

Should Services continue to grow in the teens for the next five years, such as at a 14% 5-year CAGR through FY28, it would be generating approximately $164 billion in revenue, or slightly more than 30% of Apple’s projected $538.6 billion in revenue. Price hikes, introduction of AI features, or finding ways to increase engagement and boost the ratio of paid subscriptions per active device all support this long-term revenue growth outlook for the segment.

Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article.

The I/O Fund was early to AI with a 45% allocation in 2023. For more in-depth research from Beth, including 15-page+ deep dives on the 10 stock positions the I/O Fund owns, subscribe here.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Apple Bets On The Emerging Markets Growth Story

Posted on June 5, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Jun 1, 2023,08:15am EDTForbes Forbes on Jun 1, 2023,08:15am EDT

The smartphone market continues to be hit hard in q1, with prices down 20% and shipments down 13%, according to Canalys. Despite double digit decline across the industry, Apple delivered marginal growth on its iPhone sales at +1.5%. According to Counterpoint Research, Apple grew smartphone shipments by 1 million year-over-year from 59 million in Q1 2022 to 58 million in Q1 2023. The decline of (1.7%) was better than the (14%) decline for the global smartphone market.

Source: BETH KINDIG

According to Apple’s management, the reason the company was able to overcome smartphone weakness was due to sales in the emerging markets. The company’s CFO, Luca Maestri, said in the earnings call, “We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis.”We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis.”

Within the emerging markets, India is a primary focus for Apple due to a growing middle class. According to a survey from a non-profit, the middle-class population has grown from 14% in 2004-05 to 31% in 2020-21. Tim Cook also points to the fact that the country is at a tipping point. “There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there.”There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there.”

Although Apple does not break down India sales figures, Bloomberg News reported that sales grew by 46% YoY to about $6 billion for the trailing twelve months ending March 2023. According to a Wedbush analyst, “Apple is now aggressively looking at India from both a production and retail expansion over the coming years that the firm believes will be a strategic poker move for Cupertino that could ramp annual revenue to $20 billion by 2025 in India.”

Tim Cook recently visited India in April and opened two company-owned retail stores. Apple was the second biggest revenue generating brand in India in 2022, second only to Samsung as it gained 18% of the total value of smartphone shipments, according to research firm Counterpoint.

The company also plans to make India a manufacturing hub and this move is seen as the company’s efforts to rely less on China. JP Morgan mentioned in its research note last year that the company plans to produce 25% of all iPhones from India by 2025. However, it could take a few more years to reach the 25% level. According to Bloomberg News, the company now produces 7% of total iPhones from India and this is up from 1% in 2021.

Apple supplier Foxconn announced recently that the company plans to invest $500 million to set up a manufacturing plant in India. It had also announced in March that it received approval from another state in India for a $968 million investment. Similarly, Foxconn has plans to expand its existing manufacturing plants in India.

There are 2 billion Apple devices active in the world and there are 659 million smartphone users in India, compared to 975 million in China and 276 million in the United States. With India being second place, it makes sense that Tim Cook is focused here.

Source: Statista

According to Morgan Stanley analyst Erik Woodring, “The firm's 2023 revenue and EPS forecast increased by 1% and 3%, respectively, post-earnings and while the firm calls out iPhone 15 and an AR/VR headset as the next catalysts, it adds "don't sleep" on the emerging markets and India story at Apple.”

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Apple’s Brand Needs a Catalyst

Warren Buffet was recently asked why he is invested in Apple and his reply was “If you’re an Apple user and somebody offers you $10,000, but the only proviso is they’ll take away your iPhone and you’ll never be able to buy another, you’re not going to take it. If they tell you if you buy another Ford car, they’ll give you $10,000 not to do that, you’ll take the $10,000 and you’ll buy a Chevy instead.”

Not surprisingly, Apple is one of the world’s most valuable brands, rivaled only by Amazon and Google.

Source: I/O FUND

Despite this strong brand, the next chapter for Apple has been slow to materialize. As seen below, wearables have not become the “next big thing” for Apple with $8 billion or so in revenue per quarter. Emerging markets are promising, yet at the $20 billion per year or $5 billion per quarter, Apple will struggle to move the needle for some time by relying on this strategy alone.

Earlier this month, we published an article “Apple’s Stock in Focus: More Profitable Than Banks” where we stated:

“Investors looking for the “next big thing” will point toward companies like Stripe, Sofi or Square as the leading fintech stocks. Meanwhile, the next big thing to disrupt the financial sector may be sitting in plain sight. Apple grew its cash trove through legendary design and hardware, yet how Apple chooses to leverage its enormous reserve of cash may be what writes the next chapter for the world’s most valuable company.”

Services remain a long-term opportunity for the company to monetize its installed base of over 2 billion active devices. Apple recently launched a new high-yield savings account that offers a 4.15% interest rate, which is 10 times higher than the United States national average and 415 times higher than what Chase or Bank of America offers at 0.01%. Apple is also lending from its balance sheet for the first time ever through Apple Pay’s Buy Now and Pay Later product.

To illustrate how effective Apple’s move into finance tech has become, the cornerstone product, Apple Pay, currently has 75 percent adoption among iPhone users. This is up from 10% in 2016. In addition to taking on banks, Apple is also competing with Mastercard and Visa with features that allow merchants to use iPhones and iPads to send and receive payments. The long-term goal is to replace wallets with iPhones.

Spotlight on Earnings

For some time now, Apple has been a value stock. We discussed this when we stated:

“While comparing to other popular value stocks like Walmart, Apple is trading at a slightly higher forward P/E ratio of 23 compared to Walmart’s 19. However, the company’s net profit margin of 25.71% is very good compared to Walmart’s 1.45%.

Similarly, Apple has an excellent free cash flow margin of 26.37% compared to Walmart's negative free cash flow margin of -5.15%. This helps illustrate why Apple’s stock has held up well as investors are able to participate in the most cash efficient company of all time while also participating in the company’s future innovation cycle.”

The most recent earnings results continue to prove that Apple’s management team is strong on efficiency. Despite revenue declining by (2.5%) YoY to $94.84B, the gross margin improved from 43.8% to 44.3% in the most recent quarter, up 50 basis points due to cost savings and a favorable mix from Services. The free cash flow margin remained solid at 27% compared to 26.4% in the same period last year. The board also authorized an additional $90 billion share repurchase and increased the quarterly dividend by 4% to $0.24 per share.

Source: COMPANY IR

Operating income declined by (5.5%) and net income declined by (3.4%) YoY to $24.2 billion. EPS of $1.52 remained unchanged from the same period last year, and notably, the company beat EPS estimates by 6.4%.

As stated, iPhone sales were up +1.5% to $51.3 billion. Mac revenue declined by (31%) YoY to $7.2 billion. This was due to a strong comp with M1 MacBooks sales from last year and a weaker consumer. iPad declined (13%) YoY to $6.7 billion. Wearables declined (0.6%) to $8.8 billion.

Services grew 5.5% YoY to $20.9 billion.

Paid subscriptions of 975 million, was up 18.2% YoY. This segment is important as there is a higher gross margin of 71% compared to 36.7% for products.

Management’s directional insights for the June quarter were soft with foreign exchange negatively impacting growth by about 4%. The company’s CFO, Luca Maestri, said in the earnings call, “We expect our June quarter year-over-year revenue performance to be similar to the March quarter, assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind and we expect a negative year-over-year impact of nearly four percentage points.”

Analysts expect revenue to decline by (1.1%) YoY to $82.03 billion.

Where Can Apple Stock Go from Here?

There are two scenarios we are tracking for Apple based on the current price information:

The blue count suggests that we are in a long and drawn-out correction that will ultimately be targeting new lows. If Apple stays below $181.50 and then breaks below $150.50, the odds that this scenario is playing out will become very high. If this plays out, we will look towards the blue target box for a major low.

The red count suggests that the January low for Apple was a major one. This will put us in the final push in the large uptrend that began in 2009. If Apple can break above $181.50, we can see a final push to the upper red target box between $192 – $210.

Source: I/O Fund

Apple is currently under the major resistance zone between $176.25 – $181.50. Based on the relative weakness in most markets right now – small caps, industrials, materials, financials, transportation, the Dow Jones, as well as many global markets – we are expecting volatility to return sometime in early June. If Apple fails to punch through the $181.50 resistance before the market pulls back, it will need to hold the $160 – $150.50 range in order to allow for this final swing into the red target zone above. Below $150.50 and the top will be in for Apple, as the odds will greatly increase that we will be testing Apple’s January lows.

Conclusion:

My firm does not own Apple at the moment, yet given its enormous brand value and high install base, it’s a company we track closely. In addition, the company’s strong financials will only become more attractive in the event of a recession. For our purposes, my firm would want to see Services materialize as a leading Fintech play, and we would want to wait for the price action outlined above to play out before buying this stock.

The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund does not own shares in AAPL at the time of writing but may own other stocks pictured in the charts.

Royston Roche, I/O Fund Analyst, contributed to this article.

Apple’s Stock In Focus: More Profitable Than Banks

Posted on May 4, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on May 1, 2023,10:07pm EDTForbes Forbes on May 1, 2023,10:07pm EDT

Investors looking for the “next big thing” will point toward companies like Stripe, Sofi or Square as the leading fintech stocks. Meanwhile, the next big thing to disrupt the financial sector may be sitting in plain sight. Apple grew its cash trove through legendary design and hardware, yet how Apple chooses to leverage its enormous reserve of cash may be what writes the next chapter for the world’s most valuable company.

The markets have clearly shifted from favoring top line growth to emphasizing bottom line strength. This reminder is echoed across every industry, but none more so than the finance industry where regional banks are defaulting due to high bond rates and depositor withdrawals.

It’s easy to dismiss the financial sector in today’s tech focused market. After all, financials only account for 11% of the total market cap of the S&P 500, with 3 sectors ahead of it. However, all companies depend on loans, and when banks get scared, the credit window shuts, which tends to lead to outsized bankruptcies. Simply put, banks cause the worst kinds of recessions. We detailed this more here.

Today, the tech industry has disrupted nearly every industry in its path from energy, to commerce, to automotive, to entertainment. Perhaps now is the time that tech will finally disrupt the banking sector.

Apple Is More Profitable Than Banks

JP Morgan has over $1.4 trillion on its balance sheet compared to Apple’s $165 billion. However, Apple is more profitable with $99 billion in profit last year, which is higher than JP Morgan and Citi combined. What Apple has to boot is access to 1.2 billion iPhone users. Therefore Apple may not have as much cash as a bank, but it’s fundamentally a more investable business model.

For stock investors, Apple’s large cash reserves are certainly not news as the company has more cash than any other tech stock. What’s news is that the FED is aggressively draining liquidity from the system as a means to fight inflation, as shown in the chart below, that compares the trends in liquidity to the S&P 500.

Source: I/O FUND

There has been a long-standing relationship to liquidity and asset prices, and until we can see a new liquidity cycle start, companies with cash will have better leverage over those that don’t. You can also expect volatility in the markets to remain high until there’s a new liquidity cycle, which we covered when we discussed where we hold cash.

The longer this plays out, the more ways Apple can leverage its $165 billion in cash as consumers will seek better financing terms, higher yields and credit lines will also increase.

For example, Apple recently launched a new high-yield savings account that offers a 4.15% interest rate, which is 10 times higher than the United States national average and 415 times higher than what Chase or Bank of America offers at 0.01%. Apple is also lending from its balance sheet for the first time ever through Apple Pay’s Buy Now and Pay Later product.

Apple has the best operating margin among the FAANG stocks at 30.7%. Net profit last quarter was $30 billion with free cash flow of also $30 billion.

Source: I/O FUND

Apple is not immune to the effects felt across corporate bonds and mortgage securities. According to CNBC, the company has $13 billion in unrealized losses. These losses are not reported as long as Apple plans to hold to maturity, and as long as the bond issuers are solvent enough to repay the debt. Also, a loss of $13 billion is not detrimental to Apple, as the company generates $100 billion in free cash flow per year. Notably, the company used to have $250 billion in cash reserves before increasing buybacks in 2017.

Apple has debt of $111 billion for a net cash balance of $54 billion. The company paid $3.8 billion in dividends and equivalents and repurchased shares worth $19.5 billion.

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What to Watch for in Q1 Earnings

Apple is not a growth stock. The company is known for strong margins, outsized cash flows, and stable balance sheet. The company’s revenue has been partly negatively impacted from the adverse FX movements. Analysts expect revenue to decline by (4.6%) YoY to $92.81 billion yet the company’s revenue is expected to grow after the June quarter.

Source: SEEKING ALPHA

On a fiscal year basis, Apple is expected to report a rebound next fiscal year:

Source: SEEKING ALPHA

Apple has the highest operating margins among the FAANG stocks. For EPS, Apple is expected to report the following:

Source: YCHARTS

Apple’s main segments are iPhones, Macs, iPads, Wearables and Services. Of these, the Mac segment is dragging on Apple’s results. Last quarter, Mac sales declined by (29%) YoY to $7.7 billion. Management expects revenue to decline double digits due to challenging comparable with the M1 Mac Books from last year and a weaker consumer.

According to IDC, there was a YoY decline of (29%) in the shipments of traditional PCs in Q1 2023 due to weaker demand and excess inventory. The report from IDC suggests that Macs declined by (40%) in Q1 2023.

iPhone sales in the December quarter declined by (8%) YoY to $65.8 billion yet were flat excluding foreign exchange rates. Management expects revenue to accelerate in the March quarter when compared to the Dec quarter, per the earnings call: “For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance.”

According to the research firm Canalys, the global smartphone market declined by (13%) YoY in Q1 2023. The report from Canalys states that Apple gained 3% in global market share from 18% to 21% driven by the demand for iPhone 14 Pro series. Samsung was the only leading vendor to report QoQ growth and also regained the #1 position at 22% market share.

The Services segment is the second largest segment after iPhone. This is where payment services and loan products will show up. Many investors see this as the long-term opportunity as Apple is monetizing it’s installed base of over 2 billion active devices. The installed base grew by 8% YoY. Services revenue grew 6% YoY to $20.8 billion and grew double digits excluding foreign exchange rates.

The company has more than 935 million paid subscriptions, up 19% YoY. Per CFO, Luca Maestri, The growth is coming from every major product category and geographic segment, with strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam.”strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam.”

Big Tech is Propping up the Nasdaq

In the early phase of a bull market, we tend to see expansive buying amongst most sectors and markets, with a relative focus in your economically sensitive sectors like small caps and high beta names. This is simply not the case right now. In fact, what we are seeing is a handful of big tech names propping up the markets. Meanwhile, underneath this, economically sensitive stocks are getting aggressively sold while Big Tech props up the market.

Source: I/O FUND

Furthermore, the percentage of Microsoft and Apple’s combined weighting in the S&P 500 has never been higher. The S&P 500 weighting is according to market cap, which is price times float. The longer buying happens in these two names, accompanied with selling in other areas of the index, the percentage weighting becomes stretched to unhealthy extremes. This is not characteristic of a burgeoning bull market; instead, it is the type of behavior we see at market tops.

Regarding Apple’s price chart, we believe that the bounce off the October 13th low in 2022 is starting to top out.

I/O FUND

We have been talking about the $169-$170 price target for many months in our premium service. Now that we are here, you can see how the market is trying to push higher on weaker volume and weaker momentum. We could see a push to the $175 region in this final push higher, but soon, AAPL will have to correct. If the structure of this correction is a 5 wave decline, then we will be targeting new lows. On the other hand, if this pullback is a 3 wave move, we could see a move back to the $145 region only, before a fresh attempt higher is made.

Note on Valuation:

Apple is trading at a premium with a current PE ratio of 28. The stock does not tend to hold well at a PE ratio of 30.

Source: I/O FUND

The forward PE Ratio of 28 is also stretched and does not hold well at this level historically.

Source: I/O FUND

Conclusion:

Apple is the most likely candidate to disrupt the financial sector. The company’s reach of 2 billion devices has assisted its slow roll-out of payment services with 75% of iPhone users opting into Apple Pay. One can only imagine the potential success Apple may have in leveraging its cash for higher yields during a time when banks are weak in reputation and balance sheets.

In the upcoming earnings report, expect weakness in Macs to overshadow the other segments. iPhones are expected to be flat yet the Services segment is where fintech growth will show up. Overall, this is unlikely to be a standout quarter for Apple on the top line, so look for surprises on the bottom line to drive the stock.

We have Buy levels we are targeting for Apple, which we share with our premium research members each week as the stock progresses. We believe our target buy level will set us up for gains in Apple’s stock when the next bull cycle begins. We provide in depth macro and individual stock analysis so that readers can better understand why we buy/sell. In this market, we frequently take gains.

We also issue real-time trade alerts when we enter and exit stocks. YTD, our firm has held the two top performing assets in the tech industry – Nvidia and Bitcoin — at high allocations. We also issued a buy alert with NVDA last year at $108 and with Bitcoin in the $16,000 region, based on the type of analysis we provide. You can learn more here including information on our next webinar, this Thursday at 4:30 pm Eastern, where we review our positions live.

Portfolio Manager Knox Ridley and Equity Analyst Royston Roche contributed to this article.

Netflix missed on revenue and was inline on EPS. FX headwinds create mixed reactions to this particular earnings report, and I suspect the strong cash flow also helped price after hours. Last quarter, a large EPS miss was reported whereas it was due to a FX adjustment.

This quarter, revenue was $8.162 billion or $8.5 billion on a constant currency basis compared to $8.18 billion estimated. This is widely reported as a miss, but on the other hand, the market has been forgiving of FX headwinds with other companies.

The guide was lower than expected at $8.24 billion compared to $8.48 billion expected. The company is pushing out its expectations for the new ad tier to drive top line growth in Q3 whereas the previous expectation is that this would start to show up in Q2. Password sharing will be “broadly” rolled out including in the United States in Q2.

EPS of $2.88 was in line. EPS for next quarter is a miss at $3.06 EPS expected versus $2.84 EPS guided.

The gross margin is 400 bps lower this year at 41.20% with flat gross profit of $3.35 billion compared to $3.5 billion last year. The operating margin of 21% was also lower compared to last year’s 25% OPM yet this met management’s guide for an operating margin of 18% to 20%. Notably, management had stated last quarter that “operating margin to be down YoY due to timing of content spend.” Similar to operating margin, net margin and adjusted EBITDA were lower but within expectations.

In the comments on the forum, you can read from forum members on why margins are the most important line item for Netflix moving forward.

Netflix exceeded on free cash flow at $2.1 billion compared to $3 billion for the full year last year. The company is raising full year guidance on free cash flow to $3.5 billion. The free cash flow margin is more than double from last year at 25.9% compared to 10.19% in the year ago quarter.

Key Metrics & Additional Notes:

Password Sharing & Geographic Regions:

Global paid adds of 1.75M came in slightly shy of analyst estimates of 1.8M.

For password sharing, Latin America provides some clues as to how a broader rollout will perform. According to management there was a cancel reaction which later eased. The region reported a loss of net adds of (0.4M) compared to net adds of 1.76M in Latin American last quarter, yet the revenue was up 7% YoY (+13% on constant currency basis).

The company stated that other regions, such as Canada, were “directionally consistent with what we saw in Latin America.”

There was a similar pattern in the United States Canada (UCAN) region where there was low net adds yet higher revenue growth. The region reported 0.1 net additions with revenue up 8% YoY.

In the year ago quarter, these regions were flat or reported a decline. There can also be churn coming out of Q4 for Netflix since that quarter has high net adds.

Another observation is that LatAm and UCAN both had expanding Arm, or average revenue per membership, whereas the other two regions saw a lower Arm. This could be encouraging in terms of a broader rollout on password sharing driving more top line growth in the second half of the year.

UCAN up +9% from $14.91 to $16.18
LatAm up +3% from $8.37 to $8.60
EMEA down (6%) at $10.89 this quarter compared to $11.56 in the year ago quarter
APAC down (13%) at $8.03 this quarter compared to $9.21 a year ago

Notably, average paid membership increased in APAC, which were up 17%. This is clearly a large region but there’s been some attention on India specifically where Netflix has lowered prices. This would make sense to where net adds increased but ARM decreased.

Ad Tier:

Upfront season is coming, which means Netflix will likely have to state the company’s expected scale for the ad tier come Q3/Q4. Right now, the company is not guiding for this but analysts believe it will be in the 13M range.

We covered this in our Essentials Pre-ER write up. Per Forbes/Bloomberg: “After a slow start Netflix ad tier has been gaining traction with U.S. subscribers. After analyzing their internal data, BloombergBloomberg reported in its first two months, Netflix had one million active users. Before its launch, Netflix had projected 1.1 million by year end 2022 increasing to 13.3 million by the third quarter 2023. Industry analysts project Netflix could eventually wind up with 30 million U.S. subscribers on its ad supported tier. The U.S. is one of the 12 markets where Netflix is now selling ads. At its most recent earnings report Netflix had 74 million total U.S. subscribers with 231 million worldwide.”

The company continues to believe the ad tier will be accretive to the bottom line, especially considering the ad tier will monetize better than its basic and standard plans. The ad tier will be $6.99 per month plus ad dollars. With that, management believes there will be “50% or more incremental profit contribution to the business.”

Earnings Call:

According to management on the call, Q2 is the quarter to watch for password sharing.

“Yeah. So that launch we are doing in Q2 is a very broad launch, it includes the United States, includes many, many other countries. I mean, we reserve the right for some countries where we think there’s a different approach. But I would say the bulk of our countries, and certainly, when you think about it from a revenue perspective, the vast majority will be rolling out in Q2.”

The ad tier is expected to be accretive to the company’s margins at 50% or higher.

“Jessica Reif Erlich (moderator)

And then I just wanted to clarify something, Spence, I think you said, this is a 50% margin. I mean, typically, advertising could be as high as 80% or 85% margins. Is that — do you expect to build up to that or do you think it’s really just a 50%-plus business?

Spence Neumann

Well, I put plus in there. So I said at least 50% and it was really just to highlight the fact that we are still in startup mode of this business and so leaning a little conservative. But, yes, our expectations over time is that it would be meaningfully over 50%, but I don’t want to give a specific number yet.”

Conclusion:

The impact from password sharing and the ad tier is later than originally anticipated (Q2 for PW sharing and Q3/Q4 for the ad tier), but it’s not that surprising because these are monumental changes that require time. In this regard, we are happy to be patient. Part of the thesis was the bottom line and the cash flow, and the company has been performing here, as expected.

However, price was already looking stretched and we may trim the position according to technicals. The stock is up about 100% from the June low so the market may be getting antsy to pocket some of the gains from the second half of last year.

Netflix Q1 Earnings: Becoming an H2 Story (Like Most Stocks We Own)

Posted on April 19, 2023June 30, 2026 by io-fund

Netflix’s pivots – which is the password sharing and ad tier – are expected to show up in Q2 for password sharing and then Q3/Q4 for the ad tier whereas previously the goal was to have impact by Q1 and Q2. The initial signs of PW sharing are encouraging. More on this below. The ad tier is too early to have any initial impressions or data to work with, although long-term it will be accretive to margins and should have a positive impact on the top line, as well.
FCF was impressive at $2.17 billion with management raising the FY guidance to $3.5 billion.
Over the past few quarters, Netflix’s after hour price activity can be volatile. I believe this is due to FX headwinds, which are often reported as a miss, but then the market proves to be forgiving of the lower revenue/EPS numbers in favor of constant currency. This is my best guess as it’s been volatile for a few quarters, which leads me to believe machines are trying to catch up to the reported numbers versus constant currency basis. Notably, the stock price regained its losses before the earnings call was released.
The ad tier could see a flurry of headlines next month for the upfront season. The upfront season’s best-case scenario is committed upfront spend for 13 million subscribers, which is a small audience compared to Netflix’s roughly 220 million subscribers. Our plan is to follow price for this stock and to be patient long-term as we are optimistic on the outcome.
The I/O Fund has been planning on cutting back on our Netflix position, which was outlined before earnings here and also in Knox’s Position Report here.
The Netflix pre-Earnings report found here has additional information to supplement the post-earnings report below.

Financials:

EPS of $2.88 was in line. EPS for next quarter is a miss at $3.06 EPS expected versus $2.84 EPS guided.

In the comments on the forum, you can read from forum members on why margins are the most important line item for Netflix moving forward.

Key Metrics & Additional Notes:

Password Sharing & Geographic Regions:

Global paid adds of 1.75M came in slightly shy of analyst estimates of 1.8M.

The company stated that other regions, such as Canada, were “directionally consistent with what we saw in Latin America.”

There was a similar pattern in the United States Canada (UCAN) region where there was low net adds yet higher revenue growth. The region reported 0.1 net additions with revenue up 8% YoY.

In the year ago quarter, these regions were flat or reported a decline. There can also be churn coming out of Q4 for Netflix since that quarter has high net adds.

UCAN up +9% from $14.91 to $16.18
LatAm up +3% from $8.37 to $8.60
EMEA down (6%) at $10.89 this quarter compared to $11.56 in the year ago quarter
APAC down (13%) at $8.03 this quarter compared to $9.21 a year ago

Ad Tier:

Earnings Call:

According to management on the call, Q2 is the quarter to watch for password sharing.

The ad tier is expected to be accretive to the company’s margins at 50% or higher.

“Jessica Reif Erlich (moderator)

Spence Neumann

Conclusion:

April Stock Tip: Our Netflix Buy/Sell Plan

Posted on April 5, 2023June 30, 2026 by io-fund

Netflix is coming into a nail biter of a report. The ad tier will be under pressure in terms of how it’s performed in various regions when the company rolled it out in January. There is a report from Bloomberg that Netflix added 1 million in their first two months. An analyst noted below is expecting 1.75M total for the quarter. Overall, the goal is to reach 13M by Q3 2023.

Fundamentally, Netflix has become a different stock over the past year. In addition to the new advertising tier, which we hope is a catalyst, we own Netflix due to the underlying fundamental strength. According to analyst estimates, Netflix bottomed on revenue growth last quarter with noticeable improvement in H2 2023. The company has been transparent on how they will meet guidance on margins, including free cash flow.

The EPS is also rebounding with analyst consensus showing a 100% increase on EPS over the next two years. This is subject to change, but helps complete the picture as to why we’ve been covering Netflix closely.

Netflix is our largest position right now, thus we guard it closely. Our service is setup to show our Members what it looks like to realistically manage a portfolio. We do not provide an endless pipeline of stock tips. We carefully build positions and we carefully take gains, at times. We will gladly talk about the same stock dozens of times if it’s going to make us money.

Those who are addicted to a constant stream of information, and who are addicted to new stock tips, will get hurt in 2023. There simply aren’t that many great tech stocks in the current macro environment. If there’s anything you get from our service, I hope it’s that one important take away. 2023 is the year to hold fewer stocks, and to know them well.

Active management helps to participate in the gains. For example, to illustrate — Netflix is down (42%) from Jan 1st, 2022 and it’s up 61% from October 11th. This is why active management is well worth our time.

Buy Plan/Sell Plan – April Stock Tip:

By Knox Ridley

Between $379-$420, Netflix will be in the high-risk zone. Do not be shocked to see us cut NFLX in half if we get into that zone. If we do get there, this will be a 20% to 30% gain from when we recommended the stock for Essentials and a gain of 75% gain from our first entry in August on the Pro/Advanced side. Normally, our Essentials plan would have participated in the higher gains, but we had not launched the service yet. Our Essentials Newsletter went live around Thanksgiving.

Netflix is working on the final 5th wave of a very large degree pattern. It bottomed in May of 2022, so it has taken this pattern almost a full year to complete. Once NFLX gets into the $379-$412 region, the pattern will have met the minimum requirements for completion. We would consider that region to come with heightened risk. In fact, we expect to reduce our position substantially if we get to that price target. This will remain our primary thesis as long as price holds the $300 region. For long-term buyers, we believe the time to accumulate is not now.

What we are watching for:

There is outsized pressure on the advertising tier given the global rollout in test regions. Although password sharing was cutoff mid-quarter, Wall Street will want to see evidence this strategic move will be accretive. Per channel checks noted below, the Street is expecting 1.75M subscribers from the ad tier, although notably, Netflix no longer reports subscriber numbers.
Per Forbes/Bloomberg: “After a slow start Netflix ad tier has been gaining traction with U.S. subscribers. After analyzing their internal data, BloombergBloomberg reported in its first two months, Netflix had one million active users. Before its launch, Netflix had projected 1.1 million by year end 2022 increasing to 13.3 million by the third quarter 2023. Industry analysts project Netflix could eventually wind up with 30 million U.S. subscribers on its ad supported tier. The U.S. is one of the 12 markets where Netflix is now selling ads. At its most recent earnings report Netflix had 74 million total U.S. subscribers with 231 million worldwide.”
Netflix has been cutting costs this quarter. We want to see the company maintain bottom line strength. For Netflix, sometimes misses on the bottom line are due to FX headwinds, and other times they’re due to lumpy content costs.
Q1 is expected to be a weaker quarter for the year on operating margins with management stating “For Q1’23, we expect operating margin to be down year over year (20% vs. 25%) due primarily to the timing of content spend.” This would be 18-20% operating margin, down from a 25% margin in the year ago quarter.
Social media has a hard time dissecting the lumpiness in the new macro. Nvidia was a target for shorts because of this, what they didn’t realize is that NVDA had bottomed fundamentally in the prior quarter. In a nutshell, if the bottom-line miss is transitory – FX headwinds or lumpy content costs – the market will be more forgiving.
If Netflix’s management has guided correctly, the company has bottomed. I explain this more below (this depends on how management guided). Notably, this is the first quarter without Reed Hastings as CEO although the C-suite team has been working with Hastings for years on this transition.
The guide I’m referring to from the last earnings call is this: “So, that all lends itself to our focus, which is kind of healthy growing double-digit revenue growth and accelerating that revenue growth throughout the year, expanding our – both our absolute profit and profit margin and then growing positive free cash flow.

Financials:

Per analyst consensus, the expected acceleration is the following:

Estimated Revenue & Estimated EPS:

Q4: 1.9% Actual
Q1E: 3.86%
Q2E: 6.37%
Q3E: 10.57%
Q4E: 13.5%

On a fiscal year basis, Netflix is expected to report:

FY2022 Actual: 6.46%
FY2023E: 8.5%
FY2024E: 11.9%

This is not a hypergrowth profile, rather what the market will want to see is quality growth. For our purposes, this can be roughly defined as an acceleration in growth that doesn’t come at the expense of the bottom line.

For EPS, Netflix is expected to report:

Q3 Actual: $2.16 EPS
Q4 Actual: $0.51 EPS
Q1E: $2.87 EPS
Q2E: $3.06 EPS
Q3E: $3.30 EPS

I included Q3 since Q4 is often much lower than the other quarters. Although the revenue acceleration may be mild for growth investors, the bottom line is expected to grow well through FY2025. There’s a lot that has to happen between now and FY2025, but it’s good to see analysts have confidence that Netflix could double its bottom line over the next two years.

Q3 Actual was $2.16 EPS and consensus from six analysts is EPS of $4.08 in Q3 Sep 2024.

Gentle reminder that FX can result in an advertised EPS number being very low/big miss. Last quarter, the $1.15 EPS was reported as $0.12. Per the write-up: “

“FX can be a lot to unpack but I believe the market is taking into account the $462 million FX remeasurement and seeing this as $1.15 EPS rather than $0.12 EPS. This is why we want to do proper due diligence (and steer clear of social media for investment research — that's an understatement) as there was some confusion over this that negatively spiraled on Twitter.”

Margins:

Regarding margins, this is what the management said in full: “We have been targeting a FY23 operating margin of 19%-20% based on F/X rates at the beginning of 2022. We now expect to deliver roughly 21%-22% operating margin on this basis (above the 19%-20% range). Rolling forward to F/X rates as of January 1, 2023, this translates into a FY23 operating margin target of 18%-20%. For Q1’23, we expect operating margin to be down year over year (20% vs. 25%) due primarily to the timing of content spend.”

Last quarter, Netflix had a gross margin of 31%
The operating margin guide works out to 18% to 20% margin, down from 25% in the year ago quarter.
Due to FX headwinds, the FY2023 operating margin will be in the 18% to 20% range. The market has been forgiving FX headwinds, partly due to a global company being desirable for diversification while the United States see a weak consumer.
The net margin can be low at first glance due to FX headwinds. It was 20% in the year ago quarter yet was 1% with FX last quarter. Without FX, it was 6.5% last quarter. This included a $462M non-cash FX remeasurement.

Cash Flow:

Cash flow for FY2022 came in at $1.6B and management guided for $3 billion in FY2023. Last year, Q1 and Q3 were very strong on FCF and Q2 and Q4 were weaker. This goes back to lumpy content spend, so investors should be prepared for this and not expect a linear path to the $3 billion.

“But that’s what plays through and then also plays through that cash flow generation that you see, where we believe with all those dynamics and managing at about the same level of cash content spend that we will have more than $3 billion, at least $3 billion of free cash flow in the year.”

The $1.6B in FY2022 compares to ($158) million for FY2021. Overall, this is a very different Netflix today as the company lost over ($3) billion in free cash flow in 2019.

The in-house moderator also hinted toward “$4 billion plus in 2024” and management did not correct her. We would need an official guide but I have this number penciled in for next year.

The company’s gross debt is $14.3 billion and the company’s net debt is $8.37 billion or 1.3X LTM EBITDA with $6.05 billion in cash. You’ll notice the LTM slightly ticked up from 1.2X LTM last quarter. To reiterate, this is because Q4 tends to be weaker than other quarters. With the $3B in FCF expected in FY2023, Netflix can get the LTM below 1X.

The gross debt will still outweigh cash for some time. The company has stated investors can continue to expect $10 to $15 billion in gross debt. According to the last 10-Q, the company’s next payment of $400 million is due in October of 2024.

It’s understandable if you’re scratching your head at Netflix’s debt. This is part and parcel with Netflix’s business model. The market has come to accept this over the past decade-plus. You’ll have to decide for yourself if the business model works for your risk profile.

Noteworthy:

The upfront season starts in May. We covered this in December when we said:

“The Second Chess Move is called The Upfront Season

Every year, advertisers and agencies negotiate and sign year-long deals with TV networks as well as connected TV platforms to commit to spend an agreed amount on ads. They call this the upfront season. Last year, NBCUniversal clocked $7 billion in the upfront season and Roku grew it’s upfront spend from$500 million to $1 billion.

The 2023-2024 upfront season will take place in the late Spring and early summer of 2023.”

Reed Hastings has stepped down. Ted Sarandos and Greg Peters are Co-CEOs. Ted Sarandos became Co-CEO in July of 2020.

The revenue drivers being closely watched are the paid sharing (cutoff passwords) and the ad tier. Management stated they are expecting modest growth for Q1 on paid net adds for subscribers and a larger net add quarter in Q2. Seasonally, Q2 is a softer quarter for Netflix. Regardless, Netflix is no longer going to report on net adds. Instead, they expect analysts and investors to rely on revenue growth.

“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. So, starting with our Q4’22 letter in January of 2023, we’ll continue to provide guidance for revenue, operating income, operating margin, net income, EPS and fully diluted shares outstanding for the following quarter, but not paid membership. Similar to our regional membership disclosure, we’ll continue to report our global and regional membership each quarter as part of our earnings release.”

Recent Headlines:

Per Bloomberg, Netflix’s ad tier reached 1M MAU after the second month. According to the report: “Most of the people signing up for the ad tier are new customers or lapsed customers, not people who immediately changed plans. The ad tier now accounts for about 20% of new sign-ups in the US, per Antenna.”

Also, per the Bloomberg report: “Netflix already has 74 million customers in the US, which means it doesn’t have that many potential new viewers. Analysts estimate the ad tier could bring in between 15 million and 30 million customers in the US, but that won’t be right away.”

My note: If it materializes, that’s some serious growth for a company that had plateaued. Reference above where management told advertisers to expect 1.75M by Q1 and Bloomberg reported up to 13 million by Q3 2023.

In February, Netflix tested lowering prices in a few regions. Per Reuters, “the price cuts took place in some countries in the Middle East, sub-Saharan African, Latin America and Asia.” See analyst note below where this was successful in India last December.

The company is scaling back on costs by restructuring its film group. Per Reuters, “Netflix will combine its small and mid-sized picture production units, cut a few jobs, scale back its output to ensure high quality titles and centralize decision-making.”

Netflix offers a video game service on smartphones and tablets, and is now bringing the video game service to televisions. Per Bloomberg: “Code hidden within Netflix’s app includes references to games played on TVs, signaling that such a plan is in motion. The code also mentions using phones as video-game controllers.” Per the report, the goal would be to attract and retain more subscribers.

Per TechCrunch, Netflix has 40 games ready to launch this year and 70 games in development.

What Analysts are Saying/Channel Checks:

“Netflix has told advertisers in the past 10 days that new sign-ups for the tier with ads had doubled in January over December, though Netflix didn't tell advertisers how many sign-ups that amounted to, people familiar with the matter told The Information's Sahil Patel. Last fall, when first pitching the ad offering, the company had told advertisers it expected the tier would draw 1.75M subscribers by the end of the first quarter, the equivalent of just 2.4% of Netflix's North American subscriber base at the end of December, the report noted.”

“Guggenheim analyst Michael Morris notes that over the past week, there have been several reports regarding Netflix pricing cuts across various markets in Eastern Europe, Latin America, and Southeast Asia, which is not the first time the company has changed prices. In December 2021, Netflix cut prices in India as it faced competition from other streaming services. Last week, co-CEO Ted Sarandos highlighted the company's success in India over the past year with viewership up 30% in 2022 and revenue increasing 25%, Guggenheim says. The firm believes Netflix is looking to extend this strategy across similar markets around the world. Guggenheim has a Buy rating on the shares.”

“Oppenheimer analyst Jason Helfstein thinks Netflix shares are at attractive levels after dropping 22% from the post-Q4 highs on fears around higher churn from enforcing password sharing and a slower advertising launch. The company's Q1 engagement is trending weaker than the previous two quarters, but in line with Netflix's previous six-quarter average, the analyst tells investors in a research note.”

“Citi analyst Jason Bazinet raised the firm's price target on Netflix to $400 from $395 and keeps a Buy rating on the shares. Netflix recently cut prices by 50% across 100 smaller markets, which represent 6% of its subscribers, the analyst tells investors in a research note. The firm believes "such dramatic" price reductions across so many markets "confused the Street." Citi thinks the price cuts are linked to password sharing enforcement and could boost Netflix's aggregate revenue by 1%. It says the "far more interesting question" is what Netflix will do in the 90 markets that do not have an advertising tier and have not received a large price cut. Netflix can either not enforce password sharing rules, launch an ad tier, or expand the price cuts, according to Citi. The firm updated its model to reflect the price reductions and updated current rates.”

“JPMorgan says there has been "considerable early pushback" around Netflix's Paid Sharing launches in select international markets, which is driving greater concerns around near-term churn. Apptopia downloads data suggests increased volatility across all four Paid Sharing markets since the rollout, and the headlines may also be impacting other markets where Paid Sharing has not yet been rolled out, including the U.S., the analyst tells investors in a research note. The firm sees potential risk to Netflix's projection for more net adds in Q2 than Q1. However, JPMorgan expects Netflix to continue down the path of transitioning users away from widespread account sharing. Ultimately it expects Netflix to generate more revenue through the combination of extra members and new standalone accounts. The firm recognizes the near-term "noise" but keeps an Overweight rating on the shares with a $390 price target.”

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Netflix Q4 Earnings: Comments on Accelerating Revenue in Q2/Q3

Posted on January 26, 2023June 30, 2026 by io-fund

Netflix reported in line on revenue and handily beat on net additions. The miss on EPS is being forgiven (it seems) as the EPS miss is due to FX remeasurement on Euro denominated debt. The market has been overlooking FX adjustments on other companies, as well.

The management team was able to provide a strong guide on free cash flow of $3 billion for FY2023, which is what we wanted to see. They reiterated a consistent operating margin, and most importantly, on the earnings call they said the words “accelerating revenue” starting in Q2. Because that discussion is important, I’ve included excerpts of the transcript below.

On our Q1 Kickoff webinar, we described the types of earnings reports we would want to buy this earnings season, and Netflix ticked those boxes. That is, a stronger bottom line in terms of cash flow, and an acceleration in revenue. The operating margin is expected to be flat but will be higher on absolute profit. We have it penciled in to watch for further improvement on OM in FY2024.

You can access our pre-earnings write-up on the forum here.

Q4 Financials:

Netflix reported revenue of $7.85 billion, in line with the $7.84 billion estimated per analyst consensus. This represents growth of 1.9% or 10% on a constant currency basis. EPS was expected to be $0.50, per analyst consensus. Netflix missed this estimate and reported $0.12 EPS.

The company stated the following:

“EPS in Q4’22 was $0.12 vs. $1.33 in Q4‘21. This was below our $0.36 forecast due to a $462M non-cash unrealized loss from the F/X remeasurement on our Euro denominated debt as a result of the depreciation of the US dollar vs. the Euro during Q4’22."

If you factor in the $462M, it would have been $1.15 EPS.

The guidance for next quarter was in line at $8.17B on revenue compared to analyst estimates of $8.13B. The EPS for Q1 guide was a bit weak, but this is likely due to FX. Analyst expectations for Q1 were $2.98 with management guiding for $2.82 EPS for fiscal Q1.

Paid net additions (or new subscribers) came in at 7.6M compared to 4.5M expected. Analyst consensus ranged between 4M and 5M going into earnings. EMEA had the highest growth followed by APAC. Notably, United States and Canada contributed 1M whereas in the past UCAN was flat or showed nominal churn. As stated on the forum, Netflix will no longer be guiding or reporting on this key metric, and will instead, guide on revenue.

Margins:

The margins came in as expected, no surprises in either direction. The reason the margins look weak is because management has stated “The fourth quarter is typically our lowest operating margin quarter of the year as it’s usually our largest quarter in terms of content and marketing spend. In addition, the aforementioned F/X impact has a high flow through to operating income (~75%-80% of the revenue impact) as most of our costs are in US dollars.”

Gross margin was 31.1% compared to 32% in the year ago quarter.
Operating margin was 7% compared to 8% in Q4 last year. FY2022 operating margin was 18% although excluding restructuring charges would have been 20%. For FY2023, the guide was 19-20%. The guide for Q1 is 20% which is lower than last year due to content costs.
Net profits were slim at $55 million compared to $163 million expected. This is where the $462M non-cash F/X remeasurement is reflected.
Adjusted EBITDA came in at 10.1% for the quarter and 20.4% for FY2022.

Cash Flow

Cash flow for FY2022 came in at $1.6B and management guided for $3 billion in FY2023. The $1.6B in FY2022 compares to ($158) million for FY2021. Overall, this is a very different Netflix today as the company lost over ($3) billion in free cash flow in 2019.

The company’s gross debt is $14.3 billion and the company’s net debt is $8.37 billion or 1.3X LTM EBITDA with $6.05 billion in cash. Note: these numbers have been updated per the Q4 ER. You’ll notice the LTM slightly ticked up from 1.2X LTM last quarter. To reiterate, this is because Q4 tends to be weaker than other quarters. With the $3B in FCF expected in FY2023, Netflix will be able to get the LTM below 1X.

That debt level is exorbitant, yet interesting enough, Netflix believes their competitors are faring much worse, per their Investor Letter: “our best estimate is that all of these competitors are losing money on streaming, with aggregate annual direct operating losses this year alone that could be well in excess of $10 billion, compared with our +$5-$6 billion of annual operating profit.”

Earnings Call:

In terms of cutting off password sharing, this was one of the most important comments on the call, where management is implying an acceleration in revenue sometime in Q2-Q3.

Jessica Reif Erlich (Moderator)

Can you provide any details, including the time frame for converting borrowers to paying accounts?

Spence Neumann (CFO)

“[…] so those dynamics that Greg just walked through, because of that as we kind of start to roll this out later in Q1, based on the timing, what we talked about is that we will have modest growth we expect in paid net adds in Q1, but kind of atypical seasonality, where typically Q2 would be a softer pay-at-ad quarter. It will probably be a larger paid net add quarter. And most importantly, what we’re most focused on is obviously revenue. That is our primary metric. And what you see is in the guide, these revenue initiatives between paid sharing rolling out and then scaling ads, you don’t see much of that in Q1, which is why we are forecasting 8% growth FX neutral in Q1 revenue. But throughout the course of the year, we would expect to see accelerating revenue growth as we roll out page sharing broadly across our business and then obviously, scale adds throughout the year, which is a more gradual build. So I just want to kind of highlight that, and that’s kind of what you’re seeing in the guidance.”

Jessica Reif Erlich (Moderator)

And given the revenue drivers of paid sharing and advertising, how are you thinking about price increases in the current year? Is it just too complicated? How are you thinking about it?

Greg Peters (Co-CEO):

Well, I would say the two initiatives that you described represent the bulk of our pricing strategy in ‘23. We anticipate that they’ll both be revenue positive, revenue accretive significantly […] And then we will go back and opportunistically ask for them to pay a little bit more so that keep this virtuous cycle going and really invest that back into incredible content and stories.

Ted Sarandos (Co-CEO):

[…] And so it’s across film, across television. It’s the content that people must see and then it’s on Netflix gives us the ability to do that. And we are super proud of the team and their ability to keep delivering on that month-in and month-out, and quarter-in and quarter-out and continuing to grow in all these different market segments that our consumers really care about. So, that to me, is core to all these initiatives working, and we have got the wind at our back on that right now.

My note: I wanted to bold the last part about content because I believe this is very important as to why Netflix has the brand leverage to cut off passwords and offer an ad tier successfully. It’s partly due to offering so much content that people “must see.” Wednesday saw 341 million hours viewed in one week and holds the new record over Stranger Things 4.

Below is a Nielsen ranking of the Top 10 Shows streamed in a given week published on Deadline around Thanksgiving. All 10 spots are taken by Netflix. Although this fluctuates and is only a sample of one week’s rankings, it demonstrates the type of influence Netflix has on viewership and engagement, competitively speaking.

Here was another important comment about revenue acceleration and an expanding bottom line when the moderator asked about Free Cash Flow (notably, they did not correct her when she said FY2024 FCF)

Jessica Reif Erlich:

So, let’s move away from content then. So, free cash flow. First of all, like, what an inflection point, $1.6 billion in ‘22, roughly $3 billion in ‘23, $4 billion plus probably in ‘24. Can you just talk about – historically, you have been more build than buy. Is there any change in philosophy as cash starts accelerating? Can you talk about overall capital priorities? And what’s driving that operating margin increase?

Spence Neumann:

[..] We are now into New Year, so we take it forward to January ‘23 to current rates, and that’s a range of our operating margin guidance of 18% to 20%. So, now FX neutral for ‘23, we are going to manage within that band to deliver at least within 18% to 20% operating margin guide. So, that is growing margins, growing absolute profit. And really what’s reflected in there is that this – we have high confidence in our ability to accelerate revenue throughout the course of the year as we scale ads and we launch paid sharing. We have got high confidence in improving the service and the strength of our content slate with everything that Ted discussed here on the call. And we are also continuing to manage our cost structure with increasing discipline. You saw that in the back half of ‘22 with our slowing expense growth and we will carry that through similarly in ‘23. So, that all lends itself to our focus, which is kind of healthy growing double-digit revenue growth and accelerating that revenue growth throughout the year, expanding our – both our absolute profit and profit margin and then growing positive free cash flow.

We will obviously know a lot more over the next couple of quarters, a few quarters as we roll out paid sharing, and we will update guidance as appropriate. But that’s what plays through and then also plays through that cash flow generation that you see, where we believe with all those dynamics and managing at about the same level of cash content spend that we will have more than $3 billion, at least $3 billion of free cash flow in the year.

Conclusion:

Management sounded more confident than usual about the password sharing and the new ad tier, and I’m guessing the confidence comes from the testing they’ve been doing. For us investors, it sounds like they will be right on time with a Q2-Q3 revenue acceleration. I did not expect them to blatantly state there would be a revenue acceleration after Q1, but in this tough market, I’ll take it.

The company also did a good job of discussing a better bottom line, of sorts. The free cash flow is clearly improving yet I’ve also seen analyst notes that point toward a better operating margin being forecast for FY2024. Overall, the comments listed above hinted towards higher revenue while confirming a consistent to improving bottom line.

FX can be a lot to unpack but I believe the market is taking into account the $462 million FX remeasurement and seeing this as $1.15 EPS rather than $0.12 EPS. This is why we want to do proper due diligence (and steer clear of social media for investment research — that's an understatement) as there was some confusion over this that negatively spiraled on Twitter.

I would also say that Reid Hastings stepping down should not be a huge surprise as he’s been Co-CEO for over two years since Ted Sarandos became Co-CEO in July of 2020. I kinda got the feeling on the call that perhaps Hastings is stepping down right now because the company is about to have some strong quarters – that’s pure speculation about his chosen timing – but I figure if a company has become your magnum opus, it makes sense to exit when it’s on solid ground.

Netflix Q4 Earnings: Comments on Accelerating Revenue in Q2/Q3

Posted on January 20, 2023June 30, 2026 by io-fund

You can access our pre-earnings write-up on the forum here.

Q4 Financials:

The company stated the following:

If you factor in the $462M, it would have been $1.15 EPS.

Margins:

Gross margin was 31.1% compared to 32% in the year ago quarter.
Operating margin was 7% compared to 8% in Q4 last year. FY2022 operating margin was 18% although excluding restructuring charges would have been 20%. For FY2023, the guide was 19-20%. The guide for Q1 is 20% which is lower than last year due to content costs.
Net profits were slim at $55 million compared to $163 million expected. This is where the $462M non-cash F/X remeasurement is reflected.
Adjusted EBITDA came in at 10.1% for the quarter and 20.4% for FY2022.

Cash Flow

Earnings Call:

In terms of cutting off password sharing, this was one of the most important comments on the call, where management is implying an acceleration in revenue sometime in Q2-Q3.

Jessica Reif Erlich (Moderator)

Can you provide any details, including the time frame for converting borrowers to paying accounts?

Spence Neumann (CFO)

Jessica Reif Erlich (Moderator)

And given the revenue drivers of paid sharing and advertising, how are you thinking about price increases in the current year? Is it just too complicated? How are you thinking about it?

Greg Peters (Co-CEO):

Ted Sarandos (Co-CEO):

Here was another important comment about revenue acceleration and an expanding bottom line when the moderator asked about Free Cash Flow (notably, they did not correct her when she said FY2024 FCF)

Jessica Reif Erlich:

Spence Neumann:

Revenue and EPS:

Margins:

Cash and Debt:

Key Metrics:

Paid Net Adds Blow Past Consensus

ARM: 1% YoY Increase

Earnings Call

Cutting Off Password Sharing Will (at some point) Reach Saturation

Demand Problem on Ad Tier

Lower Revenue Guide

Conclusion:

Services Growth Outpaces iPhone, Apple

Services Seeing Multiple Growth Outlets

Additional Levers

iPhone Demand Uncertain, China Risks Remain

Conclusion

Apple’s Brand Needs a Catalyst

Spotlight on Earnings

Where Can Apple Stock Go from Here?

Conclusion:

Recommended Reading:

Apple Is More Profitable Than Banks

What to Watch for in Q1 Earnings

Big Tech is Propping up the Nasdaq

Note on Valuation:

Conclusion:

Recommended Reading:

The Pivot of a Quarter-Century

Password Sharing:

Advertising Tier

Strong Free Cash Flow

How to Position Now and Throughout 2023

Conclusion:

Recommended Reading:

Financials:

Key Metrics & Additional Notes:

Earnings Call:

Conclusion:

Recommended Reading:

Financials:

Key Metrics & Additional Notes:

Earnings Call:

Conclusion:

Recommended Reading:

Buy Plan/Sell Plan – April Stock Tip:

What we are watching for:

Financials:

Noteworthy:

Recent Headlines:

What Analysts are Saying/Channel Checks:

Q4 Financials:

Margins:

Cash Flow

Earnings Call:

Conclusion:

Q4 Financials:

Margins:

Cash Flow

Earnings Call:

Conclusion: