Netflix Subscriber Growth Exploded – Earnings Update
Wall Street found a lot to be pleased with—and to consider—in Netflix's fourth-quarter results. Mainly, the company added 7.7 million net new subscribers, surpassing its anticipated 4.5 million. This was credited to a lineup of engaging content, not its launch of an advertisement-backed subscription plan. Consequently, Netflix's stock (NFLX) has since doubled since June 2022, with it being up by 7% to $338.09 on Friday morning. There was also the news of founder Reed Hastings giving up his role as co-CEO and Chief Operating Officer Greg Peters taking over the position with Ted Sarandos. With all of these events taking place, Wall Street had a lot to take away from Netflix's fourth-quarter results.
When Netflix reported its financial results and hosted its conference call, there were multiple components that stood out. Of particular significance were the company's views on advertising as a potential source of revenue. CFO Spence Neumann stated that, over time, ads should contribute at least 10% of revenue, potentially leading to an annual total above $3 billion. This would surpass the estimated $2 billion in ad revenue that Hulu has. While this may not be a large figure compared to Amazon's $10 billion in ad revenue during the September quarter alone, it is still an ambitious target.
Netflix's decision to reduce the amount of information on subscriber growth may need to be rethought. Last quarter, the company stated that instead of supplying details on this metric, which has previously been key to influencing the company's stock, they would only mention that growth would be mild for the quarter and more significant in the following one. The switch to concentrating on revenue growth is understandable, yet the effect of the two major strategies – ads and restricting password sharing – will remain a focal point in terms of subscriber numbers. The move mirrors Apple's decision in the past to stop giving out unit numbers for iPhones, Macs, and other hardware, however Wall Street continues to estimate these figures.
Netflix is bucking the trend of other streamers with their substantial cash flow; the company reported $1.6 billion in free cash flow in 2022 and projects $3 billion for this year. With no major acquisitions planned, the company plans to resume stock buybacks in 2023, with UBS analyst John Hodulik estimating $1.8 billion, around 1% of its market capitalization. They are also aiming for double-digit revenue growth, expanding margins, and increasing free cash flow with an estimated operating margin of 18%-20% in 2023. Additionally, Netflix is taking steps to tackle password sharing, estimating around 100 million viewers take part in this activity.
Initial trials in Latin America appear to be yielding positive results. The fourth quarter saw an increase of 4.4% in Latin American subscribers compared to the third quarter, though average revenue per subscriber declined causing overall revenue from the region to dip. During the call, Peters acknowledged that “this decision may not be welcomed by everyone”, and some individuals may decide to cancel their subscriptions.
Netflix shares have been on a tear, nearly doubling from their 52-week low. Analysts have increased their targets for the price, yet Wells Fargo's Steven Cahall remains cautious, suggesting the stock may remain flat in the first half of the year. CEO Reed Peter's and CCO Ted Sarandos have expressed confidence that the move to ads and password sharing will have a significant revenue-accretive effect. Additionally, they are confident that their must-see content will make the advertising launch successful. Now, investors will watch intently as Netflix works to progress with ads, password sharing, and the development of captivating content. The recent success of their Adams Family spinoff Wednesday is a great start.
With progress on advertising and password sharing, and Netflix's ability to create captivating content, the focus now shifts to what's next. Recently, the business unveiled a venture to deliver workout video content via a collaboration with Nike, as well as an agreement to stream the Screen Actors Guild awards from 2024. In response to questions, Sarandos mentioned that the company is open to the concept of free ad-supported TV (FAST) channels, such as the Roku Channel, Tubi, and Pluto. “We are keeping an eye on that space for sure,” he said. This follows speculation of the business possibly acquiring World Wrestling Entertainment (WWE).
This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.