Why Is Netflix (NFLX) Stock Soaring Today

What Happened?

Shares of streaming video giant Netflix (NASDAQ: NFLX) jumped 11% in the morning session after the company reported a "beat-and-raise" with revenue and EPS exceeding Wall Street's projections on solid growth in paying users. Specifically, its closely-watched advertising membership tier grew users by 35% quarter on quarter. 

Looking at guidance, Netflix lifted its full-year operating margin forecast to 27% (from 26%) while sharing a revenue outlook for the next quarter that came in higher than Wall Street's estimates. The top line is expected to continue to benefit from improved pricing and healthy new paid memberships. Zooming out, we think this was a great quarter.

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What The Market Is Telling Us

Netflix’s shares are not very volatile and have only had 3 moves greater than 5% over the last year. Moves this big are rare for Netflix and indicate this news significantly impacted the market’s perception of the business. 

The biggest move we wrote about over the last year was 12 months ago when the stock gained 10% on the news that company reported its Q3 2023 earnings. It was a strong quarter, with Netflix posting net streaming additions (essentially its paying subscribers) that beat expectations across all geographies (8.8 million net adds versus Wall Street estimates of 6.0 million). This increase was driven by new releases like One Piece and the continuation of existing hits such as The Witcher. There is probably some extra enthusiasm around this quarter's higher-than-expected numbers since Netflix rolled out paid sharing earlier, which made investors skittish about whether subscribers would leave.

On the other hand, its Q4 revenue guidance was below expectations, but the company bullishly raised its full-year outlook for both operating margin and free cash flow. 

Netflix also bought back $2.5 billion of its shares outstanding, well above the $1+ billion in buybacks for the first six months. With a fresh new buyback authorization and a higher free cash flow outlook, repurchase activity could remain strong (a tailwind to the company's stock price). 

Overall, the results weren't perfect but still quite strong, especially amid fears about what the paid sharing development could do to churn. Given the speed at which sentiment has shifted bearish during the year, we are not overly surprised by the market's positive reaction.

Netflix is up 61.3% since the beginning of the year, and at $755.65 per share, has set a new 52-week high. Investors who bought $1,000 worth of Netflix’s shares 5 years ago would now be looking at an investment worth $2,744.

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