Netflix’s Hybrid Sports Streaming Strategy Sets It Apart (NASDAQ:NFLX)

The last time I analyzed Netflix (NASDAQ:NFLX) (NEOE:NFLX:CA), I focused on their Q1 results and a deal with the WWE, suggesting investors should pay more attention to this than the company’s decision to stop providing quarterly membership guidance.

Since April 2024, Netflix’s stock has risen by 10.3%, outperforming the S&P 500’s 8.3% gain during the same period. In this article, I will dissect Netflix’s Q2 earnings and argue that its hybrid sports strategy will help it stay ahead in the competitive landscape, and also assess the progress of its ad business.

Netflix reported another strong quarter, surpassing both top- and bottom-line estimates. Q2 revenues were $9.56 billion, a 16.8% year-over-year increase, beating analyst expectations by $28.2 million. Diluted EPS rose by 48.3% year-over-year to $4.88, exceeding estimates by $0.12. Global streaming paid net additions reached 8.05 million, showing a 36.6% year-over-year growth, although it was a 13.7% sequential decline. The company’s operating margins were 27.2%, surpassing guidance and improving by 5% compared to the previous year. Free cash flow slightly decreased to $1.21 billion from $1.34 billion in Q2 FY23.

The company updated its revenue and operating margin guidance for the full year, now expecting FY24 revenues to grow by 14%-15% (up from 13%-15%) and operating margins to reach 26% (up from 25%). Netflix expects lower year-over-year paid net additions due to the impact of paid sharing.

One notable highlight from this quarter is Netflix’s progress in live sports. After securing a deal with WWE, Netflix has now entered into a partnership with the NFL to stream two Christmas Day games. The company also obtained rights to stream at least one NFL Christmas game in 2025 and 2026, with an option for a second game. This Christmas, Netflix will stream games featuring the Kansas City Chiefs vs. Pittsburgh Steelers and Baltimore Ravens vs. Houston Texans, both of which are expected to attract large audiences.

By focusing on high-profile, stand-alone sports events, Netflix avoids long-term, costly commitments that some of its competitors face. For example, Google’s parent company, Alphabet, signed a $2 billion per year deal with the NFL to stream Sunday Ticket games for seven years, and Apple agreed to a 10-year, $2.5 billion deal with Major League Soccer. In contrast, Netflix paid $150 million for the Christmas NFL games. This selective strategy allows Netflix to reap the benefits of streaming major sports events without excessive financial commitments.

Netflix’s sports strategy isn’t just about live events; it also focuses on sports storytelling. The company recently released “Receiver,” which follows NFL receivers Davante Adams, Justin Jefferson, and others during the 2023 season. This series follows the success of “Quarterback,” another sports documentary. Additionally, “Together: Treble Winners,” which covers Manchester City’s record-breaking 2022-23 season, and “The Roast of Tom Brady,” the company’s biggest live-streaming event yet, with 22.6 million views, showcase Netflix’s diverse sports content.

This hybrid strategy, which includes both live sports and sports documentaries, could be a key growth driver for Netflix. As the company expands its ad business, live sports will be essential, especially since competitors are already in the space. This unique blend of content is likely to help Netflix stand out in an increasingly crowded market.

Speaking of the ad business, Netflix’s ad-tier membership grew by 34% sequentially in Q2. The company is building its own ad tech platform, initially launching in Canada this year before a broader release in 2025. Deals with major brands like Expedia and McDonald’s will contribute to this endeavor. The new platform aims to provide advertisers with more ways to measure impact and gain insights.

Although the ad business is still in its early stages, it shows promise. Netflix earned about $800 million in ad-supported revenue in the first half of the year, accounting for just 4% of its total sales. The company’s engagement metrics for ad-supported plans are similar to those for non-ad plans, suggesting that the ad business could become a significant revenue driver when scaled. The addition of high-profile sports events like the NFL games and the WWE deal further enhances its appeal to advertisers.

As the focus shifts from password-sharing crackdowns to the ad business, the upcoming fourth quarter will be a crucial period for measuring progress, especially with events like the Jake Paul vs Mike Tyson boxing match and the NFL Christmas games. Although still in its nascent stage, the ad business is showing steady progress and could become a substantial revenue stream.

Netflix revised its FY24 revenue guidance to a growth range of 14%-15%, driven by an impressive content slate and blockbuster live sports events. I anticipate revenues for FY24 to reach $38.75 billion, up from a previous estimate of $38.4 billion. The operating margin is expected to be 26%, translating to $10.07 billion in operating profit, and a net income of $8.14 billion, resulting in an FY24 EPS of $19.11. This represents a 59% year-over-year EPS growth.

Currently trading at a forward P/E of 30.3x, Netflix’s valuation reflects its steady growth focus and leadership status. I project an FY25 EPS of $24.23, resulting in a price target of $734, an upside of approximately 16% from current levels.

I maintain my BUY rating for Netflix, given its strong competitive position and promising growth catalysts, including its hybrid sports strategy and expanding ad business. Despite potential risks from new competitors and ongoing ad-tech development, Netflix’s unique content approach and leadership in the streaming industry make it a compelling investment.

Source: Seeking Alpha