Netflix: A "Golden Harbour" Amid Tariff Turmoil?

$Netflix(NFLX.US) On April 17th, Eastern Time, Netflix released its Q1 2025 financial report after the market closed. Under the pressure of Trump's tariffs, subscription streaming services, which are less sensitive to macroeconomic factors, have become one of the few safe havens in equity investments.

As the king of streaming with a series of hit shows, will Netflix continue its dominant position after delivering outstanding performance in Q4 2024 at the start of this year? Given the drastic changes in the environment due to tariffs, the market will also be more concerned about how management's guidance for this year will be adjusted.

Specifically:

1. Earnings significantly exceeded expectations

The main area of outperformance was in gross margin, which, in addition to the continued popularity of hit shows, Dolphin Research believes is related to price increases in multiple regions and the advancement of high-margin advertising in Q1. Management has raised the profit margin guidance for Q2 to 33% (up 1.5 percentage points quarter-on-quarter), but has temporarily maintained the full-year operating profit margin guidance at 29%, likely due to cautious considerations regarding the current environmental changes, especially as pressures gradually manifest in the second half of the year.

2. User growth "estimates" are acceptable

Although subscription numbers are no longer disclosed starting in Q1, Dolphin Research has roughly estimated the incremental subscription users in different regions based on actual revenue and price increases in various areas. Overall, the growth in subscription revenue in Q1 was still driven by user increases (Dolphin Research estimates a net increase of 4.5 million users, higher than the latest adjusted expectations of 3-4 million from institutions).

The Eurasian region saw significant growth, mainly benefiting from the local content that was popular during the season (the residual heat from "Squid Games 2," "Ad Vitam," and "Counterattack," among other European films). However, the core regions have entered a new round of price increases, which has had some short-term impact on user scale, leading to a noticeable decline in revenue growth in regions like North America.

However, based on historical trends, these are all short-term fluctuations. This year's content pipeline remains relatively rich, so it is expected to gradually attract users back, and under the effect of price increases, revenue is likely to return to double-digit growth.

3. Advertising continues to scale up

As for the AVOD business, 2025 is the year for officially starting large-scale development. In Q1, Netflix launched its 1P advertising system, Netflix Ads Suite, in the U.S. and will continue to roll it out to other regions for the remainder of the year.

The full-year revenue guidance remains unchanged at $43.5-45.5 billion, which includes expected advertising revenue that is projected to double, meaning that this year's advertising revenue is expected to approach $1.5 billion, accounting for 3% of total revenue. The current turbulent environment may temporarily delay Netflix's pace of exceeding advertising expectations, but the direction and trend remain unchanged 4. Slowing Growth in Content Investment

In the first quarter, free cash flow (Non-GAAP) was nearly $2.7 billion, a year-on-year increase of 25%. As monetization capabilities peak due to content cycles, the growth rate of content investment has slowed year-on-year.

Generally, looking at the investment rhythm, the second half of the year tends to accelerate relative to the first half. However, considering the relatively turbulent macro environment this year, with a content investment budget of $18 billion, Dolphin Research believes that it is possible that not all of it will be spent due to cautious control. Competitors may also face this issue, but generally speaking, such times are more favorable for the current leaders.

5. Increased Buybacks

With operational improvements, cash flow conditions have also improved further. Aside from basic operations, the remaining cash is mainly used for debt repayment and buybacks.

In the first quarter, $800 million in notes were repaid, and $3.5 billion was spent to repurchase 3.7 million shares. The buyback amount is higher than last year's quarterly level of $1.5-2 billion, with a remaining buyback authorization of 13.6 billion yuan.

6. Performance Indicators Overview

Dolphin Research's Investment Insights

In the previous quarter's Q4 earnings report commentary, Dolphin Research mentioned two main points of interest for Netflix this year—accelerated AVOD promotion + biennial price increases in core regions.

Although Trump's tariff policies have caused significant disruptions, putting downward pressure on the high-valued Nasdaq, especially for targets with higher macro sensitivity, which will face a double whammy of performance and valuation. However, within this context, the sensitivity of streaming media is relatively lower, and actual performance is more easily influenced by content cycle fluctuations, unless the global economy falls into a deep recession.

Based on this logic, from a fundamental perspective, Netflix, which is currently in a content cycle and entering a price increase cycle in core markets, is definitely a preferred choice among streaming media. Moreover, as the uncertainty in the macro environment increases under the trade war, direct competitors are busy dealing with their main businesses (such as Amazon's e-commerce, Disney's parks, and Google's advertising), which will again tend to tighten spending and control expansion, thus suppressing the competitive momentum that was expected to ignite this year, undoubtedly easing the defensive pressure on the current leader, Netflix.

However, from a valuation perspective, Netflix still does not offer much opportunity (recent valuation adjustments have been minimal), mainly because market expectations have not seen a substantial decline. Before the earnings report, the market adjusted its expectations for Q1 subscriber numbers (net new user expectations were lowered from 5-6 million to 3-4 million), but due to price increases in multiple regions globally, institutions also raised their expectations for ARM, so the final revenue and operating profit were only reduced by 2% compared to February's expectations. Furthermore, the market's expectations for the full year of 2025 have not been lowered.

Additionally, the market sentiment has labeled Netflix as a "safe haven" and "scarcity," leading to a closing price of $416.2 billion as of April 17. After raising the 25-year performance expectations by 10%, the valuation still stands at a P/E of 35x, but during the tariff war, the lowest valuation was only down to a P/E of 33x. Compared to the broader environment, the Nasdaq has adjusted significantly by 15% this round, while Netflix, with its not-so-low valuation, has only dropped by less than 10%, showcasing strong Alpha advantages.**

However, Dolphin Research also needs to remind that due to the high uncertainty brought by this trade war (tariff negotiations are still fluctuating, and the impact of tariffs on the economy has not been fully priced in), coupled with Netflix's current and future heavy reliance on international market performance (Q1 user growth mainly comes from Asian countries like Japan and South Korea, Indonesia, as well as Mexico in South America and countries in Western Europe), Dolphin Research believes that compared to last quarter, every round of valuation adjustment is an opportunity to enter, this time it is recommended to leave enough safety margin for oneself.

Under the assumption that the trade war does not involve service consumption and countermeasures like digital taxes, Dolphin Research believes that one can pay attention to relatively safe opportunities when market sentiment is temporarily frozen, with Netflix's valuation falling below 30x (expecting a CAGR of over 20% in profit growth over the next three years), or choose a suitable valuation range based on one's own risk preference. Historically, the lowest P/E was in 2022, at only 17x, but at that time Netflix faced more competitive impacts (Disney+ was gaining momentum) and the pandemic's impact on content supply, making the situation at that time more damaging to short-term logic compared to now, thus it is not very suitable to directly reference back.

The following are the detailed contents

1. Ace Content Supports Growth

Although subscription numbers are no longer disclosed starting from Q1, Dolphin Research has roughly estimated the net increase in subscription users in different regions based on actual revenue and price increases in various areas.

The net increase in subscription users in Q1 is estimated by Dolphin Research to be over 4 million, with a natural seasonal slowdown. User growth still stems from the content wrapping up last quarter, such as the Korean drama "Squid Game 2," the Indian "NFL Cricket League," and the currently popular British drama "Adolescence," the American drama "Beauty in Black," as well as non-English "Medusa S1," and the Korean drama "Bitter Sweet Encounter," which attract users, combined with continued efforts to combat account password sharing and the introduction of advertising packages.

Since the NFL concluded in December, Indian user activity has declined relatively quickly in Q1. Additionally, price increases in several core regions will also suppress user demand in the short term, resulting in a net increase lower than Dolphin Research's Q4 earnings report commentary, which was the expectation at the end of January.

However, because Netflix's user numbers can be tracked through Sensor Tower download data, most changes in user numbers have basically been reflected in the stock price. **As of the earnings report, mainstream institutions' expectations have been adjusted down to 3-4 million, rather than Bloomberg's lagging expectation of 4.8 million From Dolphin Research's estimates, Netflix's Q1 performance is a beat compared to institutional expectations.

By region:

The core growth in Q1 is driven by Europe and Asia, with Europe benefiting from the push for AVOD and Asia benefiting from content like "Squid Game 2." In the US and Canada, however, the new round of price increases has somewhat suppressed short-term net user growth.

In our Q4 commentary, we anticipated this year's price increase cycle in the North American market (based on the frequency of price increases in previous years and the abundance of blockbuster content this year). Although there are indeed some short-term impacts, coupled with the potential drag on the economy from tariffs, there may be some concerns in the market.

However, we believe that time will smooth out the impact of price increases on user growth, primarily due to this year's rich pipeline, which includes multiple sequels to blockbuster content, and under stable competition, it can support strong user growth this year.

For Q2 2025, Dolphin Research expects net user growth to remain around 4 million. This is mainly based on content like "Black Mirror S7," "You S5," and the season finale of "Squid Games S3." In the second half of the year, with the peak season and more blockbuster sequels like "Stranger Things" and "Wednesday" airing, single-season user growth is expected to return to over 5 million.

II. Competitive Advantage Remains Strong

The core logic for the medium to long term still revolves around the "cord-cutting" trend, and during this process, Netflix has been able to maintain its competitive advantage. According to the latest data from Nielsen, from the end of last year to Q1 this year, as events and elections concluded, the share of US streaming media returned to a new high, reaching 43.5%.

In the segmented field, Netflix's share surged to 8.6% in December last year and January this year due to the NFL and "Squid Games 2," before naturally declining in February. In terms of competitors, YouTube maintains its leading viewership share, followed by Amazon Prime Video, which also reached a new high in December, while others have remained stable or declined.

The competitive environment for long-form video streaming has stabilized and slowed down for over a year (triggered by the Hollywood strike). Originally, Dolphin Research expected that competition might intensify in the second half of this year, but with the impact of tariffs on the current macroeconomic environment being too significant, it has also brought some changes to our expectations:

— The parent companies of several of Netflix's competitors, whether Google, Amazon, or Disney, are all in industries that are highly sensitive to macro changes. Therefore, as the economic impact gradually manifests and drags down these companies' performance, Dolphin Research speculates that they may need to temporarily pause excessive investment in non-core branches. This means that the competitive environment is likely to remain stable, a trend that is certainly beneficial for the leading Netflix.

III. The impact of price increases in core regions is only temporary

In the first quarter, Netflix achieved revenue of USD 7.9 billion, a year-on-year increase of 12.5%, and a year-on-year increase of 16% at constant exchange rates, slightly exceeding guidance and expectations.

Both volume and price drive revenue growth. The growth in subscription revenue in the first quarter was mainly driven by an increase in paying users, and Netflix also raised prices as expected, not only in the core regions of the U.S. and Canada as predicted by Dolphin Research, but also in some small European countries.

As for the AVOD business, 2025 is the year for formal large-scale development, mainly reflected in:

Accelerating the launch of Ad-supported packages in new regions; last November, AVOD monthly active users reached 70 million, and in regions promoting ad-supported packages, 50% of new users chose the Ad-supported package. However, this is ultimately a short-term peak under unstable conditions. As of now, Netflix has not updated MAU data, which can be monitored in the upcoming conference call.

Promoting the 1P advertising platform (Netflix Ads Suite) in core regions (Canada, the U.S.) to optimize ad tracking and conversion efficiency. Netflix is collaborating with Nielsen and DoubleVerify to accelerate the development of 1P advertising measurement technology.

According to most market expectations, it is anticipated that by the end of 2025, Netflix will stabilize at 25 million monthly active users (users exposed to ads), with an average ad revenue of USD 3.5 per month (similar to Meta's average value level. The unit price of brand pre-roll ads for long videos is relatively high, with Netflix CPM = USD 55 > Meta overall CPM = USD 15). Although there has not been much growth compared to last year, mainly due to economic pressures this year, brand advertising faces even greater pressure. However, with the improvement of advertising ROI, rapid growth is expected starting next year.

Under this assumption, despite the economic environment being under pressure in 2025, advertising revenue is still expected to reach USD 1.5 billion, accounting for about 3% of total revenue. Coupled with the value of the subscription fee portion within the ad package, total revenue from Ad-Supported is expected to exceed 5% of the share.

III. In a turbulent environment, will investment slow down?

In the first quarter, content investment was less than USD 4 billion, with a significant decline in growth rate year-on-year. In addition to the higher base, Dolphin Research speculates that it may also be somewhat affected by the tariff trade war Generally, looking at the investment rhythm, the second half of the year will relatively accelerate within the same year. However, considering the relatively turbulent macro environment this year, with a content investment budget of 18 billion, Dolphin Research believes that it is possible that not all of it will be spent due to cautious control. Competitors may also face this issue, but generally speaking, this situation is more favorable for the current leaders.

The change in the scale of content assets at the end of the period also shows that Netflix's investment intensity during the period was not as strong as the amortization speed.

In the first quarter, free cash flow was nearly 2.7 billion, exceeding market expectations. However, the full-year guidance of 8 billion remains unchanged, possibly leaving some buffer space for pressure in the second half of the year. In the first quarter, the company also spent 3.5 billion on share buybacks, which exceeded last year's situation.

IV. Earnings Exceed Expectations

In the first quarter, Netflix achieved an operating profit of 3.35 billion, with a profit margin of 31.7% (up 3.5 percentage points year-on-year), growing 27% year-on-year, which has slowed down under a high base but still significantly exceeded market expectations.

The reasons driving growth, in addition to the continued popularity of hit shows, Dolphin Research believes, are related to price increases in multiple regions and the promotion of high-margin advertising in the first quarter, which mainly raised the gross margin level. In terms of expenses, aside from possibly involving accelerated expansion of R&D expenses related to advertising system development, both sales and management expenses grew at a low speed.

However, despite a strong start, management did not raise the full-year target as they have in the past. We believe this may still be due to considerations of the continued deterioration of the macro environment, retaining a certain buffer space.

Dolphin Research "Netflix" Historical Articles

Earnings Season (Past Year)

January 22, 2025 Conference Call “[Netflix: Efficient Investment, Entertainment Prospects Still Broad (4Q24 Conference Call Minutes)](https://longportapp.com/zh-CN/topics/26725146? invite-code=)》

January 22, 2025 Financial Report Review: The Dream That iQIYI Can't Chase? Netflix is "Flying High"

October 18, 2024 Conference Call: Continuing Efficient Investment, Netflix Sees More Than Just Streaming (3Q24 Conference Call Minutes)

October 18, 2024 Financial Report Review: How High Can Netflix "Fly" After a Great Performance?

July 19, 2024 Conference Call: Netflix: Advertising Will Become the Main Growth Driver by 2026 (2Q24 Conference Call)

July 19, 2024 Financial Report Review: The Results Are Good, But Expectations Are Higher; Will Netflix Be a Preview of the Seven Sisters?

April 19, 2024 Conference Call: Netflix: Focus on User Interaction Metrics Rather Than Just User Numbers (1Q24 Conference Call Minutes)

April 19, 2024 Financial Report Review: Netflix: Currently Strong, But Will It Soon Become "Weak"?

January 24, 2024 Conference Call: Netflix: Expanding Content Investment to Drive Price Increases with Quality Content (Netflix 4Q23 Conference Call Minutes)

January 24, 2024 Financial Report Review: Netflix: Content Dominance with Strong Foundations, True Gold Is Not Afraid of Fire Testing

October 19, 2023 Conference Call: [Netflix: Hope to Restore Original Investment Levels to Drive Growth (3Q23 Earnings Call Minutes)](https://longportapp.com/zh-CN/topics/10294408? invite-code=032064)》

October 19, 2023 Financial Report Review: Is Growth Being Questioned? Netflix Raises Prices in Response

July 20, 2023 Conference Call: The Effects of Cracking Down on Account Sharing Will Further Manifest (Netflix Q3 2023 Earnings Call Minutes)

July 20, 2023 Financial Report Review: Netflix: Is the User Growth Extracted Not Being Accepted by the Market?

April 19, 2023 Conference Call: Focused Discussion on Advertising and the Prospects of Paid Account Sharing (Netflix Q1 2023 Conference Call Minutes)

April 19, 2023 Financial Report Review: Difficult to Crack Down on Free Riders, Netflix Can't "Fly" Anymore

January 20, 2023 Conference Call: Management Changes Do Not Affect Content Strategy, Advertising Revenue Target to Exceed 10% (Netflix Q4 2022 Conference Call Minutes)

January 20, 2023 Financial Report Review: Hit Shows Save Advertising, Netflix Perfectly Interprets "Content is King"

October 19, 2022 Conference Call: Netflix: In Addition to Advertising, Will Focus on Cracking Down on Account Sharing Next Year (Q3 2022 Conference Call Minutes)

October 19, 2022 Financial Report Review: Netflix: Encountering a Surge Against the Trend Again, Good Content is the Real "Cure"

In-depth

February 16, 2022 In-depth: [The Competition Among "Kings of the Consumer Internet," Meta, Google, and Netflix are Battling Fiercely](https://longbridgeapp.com/topics/1923782? invite-code=032064)》

On November 23, 2021, in-depth article: Long Video Mixed Battle is Coming "American Version", Will Netflix and Disney Suffer?》

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure