ii view: does record Q4 subscriber growth make Netflix shares a buy?

Fourth-quarter results to 31 December

• Added 13.12 million net new subscribers to a total of 260.3 million
• Revenue up 12.5% year-over-year to $8.83 billion
• Earnings per share (EPS) of $2.11, up from $0.12 per share

Guidance:

• Expects revenues of $9.24 billion for the current first quarter
• Expects EPS of $4.49 in the current first quarter

ii round-up:

Streaming giant Netflix Inc (NASDAQ:NFLX) detailed growth in new subscribers and revenues which beat Wall Street forecasts as it continued a crackdown on customer password sharing. 

Record fourth-quarter net new subscribers of 13.12 million pushed revenue up 12.5% year-over-year to $8.83 billion, topping analyst estimates for 9 million new customers and sales of $8.7 billion. Results came shortly after Netflix announced the $5 billion purchase of rights to show World Wrestling Entertainment (WWE), its first live sports events come January 2025, with contests regularly attracting US TV audiences of over 17 million per week.  

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Shares in the Nasdaq 100 company rose more than 6% in afterhours US trading having come into this latest news up by close to two-thirds in 2023. That’s significantly ahead of a near 5% gain for rival streamer The Walt Disney Co (NYSE:DIS) and ahead of a 53% rise for the Nasdaq index itself. 

Under joint heads Ted Sarandos and Greg Peters, and during their first financial year in charge, Netflix achieved all three of its core early 2023 goals. Revenue growth accelerated to 12% from 7% in late 2022, a current operating profit margin of 21% exceeds a 20% target, while free cashflow increased to $6.9 billion over the year. 

Netflix recently secured more Oscar nominations than any other studio, with new planned shows for 2024 including further series of both Bridgerton and Squid Games, along with films ‘Back in Action’ with Cameron Diaz and ‘Six Triple Eight’ starring Kerry Washington.

The California headquartered streamer expects growth in current first quarter revenues to accelerate to 13% from the 12% just reported, with profit margin expected to rise to 24%, aided by its lower cost service and including corporate paid-for advertising.  

Broker Morgan Stanley reiterated its ‘overweight’ on the shares post the results, raising its estimated fair value estimate to $600 per share from a previous $550. 

ii view:

Started in 1997, Netflix today has a stock market value of around $215 billion, above both Sky owner Comcast Corp Class A (NASDAQ:CMCSA) at $177 billion and Walt Disney at $172 billion. Its home North American market generates its biggest slug of sales at close to 45%, followed by Europe, the Middle East, and Africa at 31%, Latin America 13% and Asia Pacific the balance of 11%. 

For investors, pressure on consumer spending, and including still elevated borrowing costs, should not be forgotten. Rivals such as Amazon (NASDAQ:AMZN) and its Prime streaming service are not standing still. Costs for businesses generally remain elevated, while unlike competitors such as Apple Inc (NASDAQ:AAPL), Comcast and ITV (LSE:ITV), Netflix does not currently pay a dividend. 

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On the upside, management initiatives regarding password sharing do appear to be seeing current 'borrowers' convert to paying subscribers. Its lower cost plan that includes advertising does ease the cost for subscribers. An estimated price/earnings ratio comfortably below the three- and 10-year averages suggests the emergence of better value, while its gaming business following the acquisition of a video games maker remains in its infancy.  

For now, and despite ongoing risks, the broad trend from linear TV to streaming should continue to benefit this now established giant of the media world.

Positives: 

• Management initiatives like advertising
• Geographical diversity

Negatives:

• Intense competition from Disney, Apple and others
• Subject to currency movements given overseas customer base

The average rating of stock market analysts:

Buy