NFLX Q1: Ads and content are key to "safe heaven"

$Netflix(NFLX)$ Q1 earnings announcement, profitability continues to rise, confirming the fundamentals of the good stone, of which advertising and content investment is still the key, but also makes NFLX become the tariffs under the chaos of the few counter-trend "risk aversion" of the technology stocks.

Performance and market feedback

1. Core data performance

• Revenue: $10.543bn ($10.5bn expected, +12.5% yoy); gross margin 50.08% (41.66% expected, +8.4pct beat), mainly benefiting from price hikes + higher share of advertising packages; operating margin 31.75% (28.2% higher than expected, exceeding 360pct yoy)

• Revenue among different regions: $4.62bn (+9.3% YoY) in the US & Canada, lower than the expected $4.68bn; $3.41bn (+15% yoy) in EMEA, higher than the expected $3.31bn; $1.26bn (+8.3% yoy) in Latin America, unchanged from the expectation; $1.26bn (+23% yoy) in Asia-Pacific, higher than the expectedUS$1.24 billion.

• Guidance: Q2 expected revenue of $11.04 billion, exceeding market expectations of $10.88 billion, of which full-year guidance for advertising revenue doubled to $1.5 billion (3% of total revenue); Q2 operating margins are expected to be 33.3%, compared to 30% for Consensus

• Buyback strength of $3.5 billion in a single quarter, up from $1.5-2 billion previously.

  

2. Market Reaction

• After the release of the earnings report rose 3.4% after trading, and again exceeded the $1,000 mark, reflecting the market's recognition of the over-expected results.

• Investor sentiment is relatively optimistic, mainly based on its subscriber growth resilience, advertising business to promote, high gross margins to verify the "price + content" dual-wheel drive logic, at the same time, although the entertainment business is optional consumption, but the company's content hardcore, when families cut back on major expenditures such as out-of-home entertainment, tend to retain the family video subscription service like Netflix, is unlikely to encounter large-scale unsubscribing.Video subscription services like Netflix tend to be retained when households cut back on major expenses like out-of-home entertainment, and are unlikely to experience mass unsubscriptions.

• The company has set its own internal growth targets: doubling revenue by 2030, boosting global ad sales to about $9 billion, and achieving a $1 trillion market capitalization.

Investment highlights

1. Earnings elasticity release, margins continue to repair Nifty's earnings performance in the first quarter significantly exceeded market expectations, the core driving factor is the significant rise in gross margins.On the basis of the continuation of the content heat, price adjustment and structural optimization of the advertising business together drove the release of operating leverage.Management raised Q2 operating margin guidance to 33% (up 1.5 pct YoY), but maintained 29% expectation for the full year, showing some prudent judgment on the macro environment in the second half of the year.

2. Regional structural differentiation is obvious, the source of over-expectation should still be subscription growth Although Nifty no longer disclose the number of subscribers in the first quarter, but the combination of revenue data and price adjustments in different markets, in the middle of the Eurasian region growth is the most eye-catching, mainly benefited from the strong drive of the local content; however, the North American market is subject to the short-term inhibition of the price increase factor, the subscription growth rate of a relative slowdown.In terms of pace, the content reserve still has depth and will gradually drive user stickiness back up subsequently.After the price adjustment takes effect, the growth of advertising revenue will lead ARPU to lift, which is expected to support the return of revenue to a double-digit growth path.

3. Deployment of advertising system accelerates, AVOD commercialization enters the scale period 2025 is the first year of scale for Netflix AVOD business.The company has deployed its self-built advertising system (Netflix Ads Suite) in North America and is expected to expand to other core markets in the coming quarters.Full-year revenue guidance is maintained at $43.5-45.5 billion, of which the advertising business is expected to double year-over-year, contributing nearly $1.5 billion or about 3% of total revenue.Despite the heightened uncertainty in the external environment, the pace of expansion of the advertising system has not slowed down significantly, with directionality confirmed.

4. Content spending pace stabilized and cash flow performance brightened to support more content expansion Free cash flow (Non-GAAP) reached US$2.7 billion in the first quarter, up 25% year-on-year, with strong cash flow performance against the backdrop of the content cycle releasing dividends.At the same time, the company remains prudent in its content investment, and there may be a potential balance in the full-year budget of $18 billion.From the point of view of the quarterly rhythm, the pace of content procurement in the second half of the year may be accelerated, but in the context of the current conservative external environment, the logic of fee control is clearer, which will help the leader to consolidate its position of relative advantage.

5. Macroeconomic challenges, Nifty business resilience stronger Potential international risks, including regulatory and tax changes, but said that these have no direct impact on guidance or operations for the time being.User engagement and retention metrics are stable, and Q2 revenue growth is expected to be even stronger, benefiting from recent price increases, continued membership growth, and new advertising revenue, which in turn makes the company somewhat of a "safe-haven" for the tech sector.

6. Capital allocation efficiency improved, buyback efforts increased Benefited from the improvement of operating efficiency, the company's capital structure further optimization.In the first quarter, the company repaid US$800 million of debt, while increasing the intensity of repurchase, spending US$3.5 billion to repurchase 3.7 million shares, which is significantly higher than last year's single-quarter repurchase level of US$1.5-2.0 billion.With a current remaining authorization of $13.6 billion, the intensity of capital return is expected to remain high going forward.

7. In terms of valuation, the current valuation level reflects the full pricing of its long-term earnings growth logic, with Forward PE still maintained at around 35x, showing strong alpha pricing. However, in the event of a disturbance in external variables, the international business exposure rather aggravates its potential risk exposure, and the elasticity space for value compression is relatively limited.Historical valuation appeared in 2022 P / E about 17 times, there is a certain historical background: content supply vacuum period, facing Disney + strong rise.