We have repeatedly highlighted the obvious qualities of Netflix in our columns. In Netflix completes a blockbuster year, we explained that after a period of stagnation between 2021 and 2022, the number of subscribers had risen sharply thanks to the solutions implemented by management. At that time, investors, overcome by doubt, had allowed the stock to fall to levels that seem ridiculous today. These solutions included advertising integrated into subscription offers, price adjustments, and profits derived from the company's clear lead over its competitors, several of which (Paramount, Warner Bros., and Disney) are still suffering from the decline of traditional television. Today, Netflix has well over 300 million subscribers, which is about 40% more than four years ago.
This success comes at a price, however, since, as mentioned above, Netflix is the best-performing company in its sector. With nearly 50x the profits (before yesterday's decline) for this year, 11x the revenue, and 60x the free cash flow, the valuation leaves no room for disappointment.
Q3 results revealed a few points of tension. Profits remained well below the $3bn expected by Wall Street. The main reason for this was an exceptional item related to a tax dispute in Brazil, which cost more than $600m. This expense ended a two-year streak during which the platform had consistently exceeded forecasts.
The second factor that has investors on edge is the operating margin. It remains very high at 28.2% this quarter, but is down from 29.2% in the same period last year.
The end of the year could also prove to be more subdued than expected. Netflix has often published conservative forecasts, which are then exceeded. This time, the target of $2.4bn in profit and an operating margin of 23.9% suggests a quieter period despite advertising activity at a historically high level.
Once again, Netflix's valuation is fueling very high expectations. The factors mentioned above should not obscure the fact that the group remains very well positioned and well ahead of its competitors. This quarter, the platform achieved record audience share in the US and the UK, and its feature film KPop Demon Hunters became the most watched in its history, with more than 300 million views in just three months.
Looking ahead, Netflix already benefits from exemplary cost control, well-organized global production, and almost entirely organic growth, with few acquisitions. However, the platform still has many levers at its disposal. Artificial intelligence can improve advertising targeting, while agreements with players such as Amazon Ads offer new monetization opportunities. Netflix is also exploring new formats to diversify its offering, including live streaming, sports, video games, merchandising, and podcasts.
This modest decline in valuation (-10% on yesterday's trading session) thus eases the pressure on expectations for the next quarter.
