Netflix's earnings report was pitch-perfect.
Investors all but gave up on Netflix (NFLX -3.05%) stock in 2022. The leading streamer posted two straight quarters of subscriber declines, and the stock plunged as investors seemed to believe the growth story was over.
However, since then, Netflix has stunned the market. The stock has more than tripled from its nadir in 2022, including Tuesday's after-hours gains, as it's adapted to the challenges in front of it, and found new ways to grow.
Those include advertising and paid sharing, and the company has begun to expand its product offerings, leaning further into games and live sports, which include a new deal with the WWE. With this new strategy, Netflix has stepped back from some of its sacred cows and shown a willingness to meet consumer demand where it is. For example, the company had refused to offer ad-based subscriptions for years and had also been reluctant to crack down on password-sharing. But both of those strategies have been successful, and the company now seems flexible in its resistance to live sports after the WWE deal.
Netflix shares jumped 8% after hours Tuesday as the company delivered a stellar earnings report.
- Revenue jumped 12.5% to $8.83 billion, ahead of estimates of $8.72 billion.
- It added 13.1 million net new subscribers, driven by the advertising tier, paid sharing, and a strong content slate. That was its best subscriber growth in a Q4 ever. Subscriber growth was broad-based with at least 2 million new adds in each of its four regions.
- Operating margin came in at 17%, up from 7% in the quarter a year ago, and beating its own guidance. For the year, its operating margin was 21%, ahead of the 18%-20% forecast it gave at the beginning of the year.
- Guidance calls for revenue to grow 13.2% to $9.24 billion in the first quarter, and it expects an operating margin of 26.2% in the first quarter of 2024. It also now sees an operating margin of 24% for the full year 2024, from a previous range of 22%-23%.
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The growth path is clear
In just a few quarters, Netflix has solved the issues that were plaguing it in early 2022, which now seem like more of a pandemic hangover than a chronic challenge.
The company has returned to its pre-pandemic cadence of adding roughly 30 million subscribers every year, and its ad tier is clearly resonating with subscribers as the company said that ads-based subscribers increased by 70%, just as it did in the third quarter. Forty percent of all new subscribers join the ad plan in markets where it's available.
Offering ads also gives the company another growth lever to pull. It can cater to more price-sensitive customers with a lower-priced option that starts at $6.99/month in the U.S., and it can also grow revenue by raising ad prices or increasing ad load in addition to the two ways it's long been able to grow revenue, by adding new members and raising prices.
The 13 million new subscribers should reassure investors that Netflix can continue to grow its subscriber base even as it now has more than 260 million paying members, and the leverage in its subscription model should help it continue to expand profit margins as its content spending has started to mature. The company plans to spend $17 billion in cash on content in 2024, equal to 2022 levels. Spending in 2023 was diminished due to writers and actors strikes.
Why Netflix stock is a buy
Netflix remains head-and-shoulders above the streaming competition, and it has a key advantage over most of its rivals. It doesn't have a declining legacy media business it needs to manage, meaning it can invest all of its resources in streaming. It's also years ahead in building out its business, which explains why it's producing strong profits and most of its competitors are still unprofitable in streaming.
Finally, Netflix still has a lot of potential growth opportunities. It recently added Grand Theft Auto to its games collection, and it's been able to license more content from its legacy media partners, more evidence that its large subscriber base is a competitive advantage.
Netflix has also been moving further into live experiences with a Stranger Things play in London, a Bridgerton wedding dress collection, a traveling Bridgerton experience called the Queen's Ball, and a Squid Game live experience as well.
Expect Netflix to take more risks like the WWE partnership now that advertising and paid sharing have both paid off, and that should fuel further growth.
The streamer still retains many of the competitive advantages that made it so successful in the first place. It's growing again and it's uncovering more new opportunities, and the stock looks primed for more gains.
Jeremy Bowman has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
