Netflix shares jump 7% after beating expectations
Netflix shares are trading over 7% higher in extended hours trading today after releasing fourth quarter results that largely came in better than anticipated. That is set to see the stock open at its highest level since April 2021 when markets open today.
Netflix adds 7.7 million subscribers in Q4
Netflix grew its subscriber base by 7.7 million subscribers in the final three months of 2022, well ahead of the 4.5 million additions targeted by the streaming giant.
This marked a significant acceleration from the 2.4 million additions seen in the third quarter, when subscriber numbers returned to growth after declining for the first time in over a decade during the first half of the year. That has reinstalled confidence that subscribers are firmly back on a path of growth.
‘2022 was a tough year, with a bumpy start but a brighter finish,’ the company said.
(Source: Company reports)
That means Netflix grew its subscriber base by 8.9 million during the full year to end 2022 with a record 230.75 million of them on its books.
The strong finish to the year was driven by a healthy content slate that included some of its most popular titles of all-time. Wednesday was the third most popular series the service has released, Glass Onion: A Knives Out Mystery was the fourth most popular film, and Harry & Meghan has proven to be Netflix’s most popular documentary to date.
Netflix reports slowest revenue growth on record
Netflix reported a 1.9% year-on-year rise in revenue during the fourth quarter to $7.85 billion. Although that was faster than the 1.6% growth pencilled-in by Wall Street, this still marked the slowest revenue growth on record since Netflix went public back in 2022.
The revenue beat and a slowdown in recruitment meant operating income climbed 7% from last year to $550 million – which was a surprise considering analysts had anticipated a sharp 43% fall to just $362.4 million. However, diluted EPS of $0.12 was down 91% from the year before and well below the $0.41 pencilled-in by analysts.
Netflix also provided a welcome surprise after generating $332 million in free cashflow in the quarter. Wall Street had expected it to burn through cash.
It is worth noting that the fourth quarter is typically the worst period of the year for financial results as Netflix ramps up spending on content and marketing for the new year.
Over the full year, Netflix reported the slowest annual revenue growth on record in 2022 at just 6.5%, while earnings declined for the first time in seven years.
Netflix ‘pleased’ with new advertising business
The slump in subscriber growth last year forced Netflix to seek new ways to reinvigorate growth, underpinned by the launch of a cheaper ad-supported tier supported by Microsoft and a crackdown on the estimated 100 million people enjoying Netflix without paying and using someone else’s password by offering new paid sharing options.
The new ad-supported service was launched across 12 countries in November and Netflix said it was ‘pleased’ with the initial results, although confessed there is ‘much more still to do’.
While the new advertising business has been met with optimism and prompted many to believe it can provide a new catalyst in 2023, it may be a slow and steady burn that doesn’t really kick in until late in the year.
‘We believe branded television advertising is a substantial long term incremental revenue and profit opportunity for Netflix, and our ability to stand up this business in six months underscores our commitment both to give members more choice and to reaccelerate our growth,’ Netflix said.
The company said it believes the service will eventually bolster revenue and profits, but said ‘the impact on 2023 will be modest given that this will build slowly over time’.
Netflix said there is little evidence that the cheaper tier is causing existing members to downgrade and pay less, and said engagement has been better than anticipated. It defended criticism that it could weaken the economics of the business by saying the financials are, ‘at minimum, in-line with or better than the comparable ad-free plan’.
The crackdown on password sharing will intensify in early 2023 as Netflix rolls out its paid sharing option, which will allow users to pay extra so they can share accounts with people in different households.
‘As we work through this transition – and as some borrowers stop watching either because they don’t convert to extra members or full paying accounts – near term engagement, as measured by third parties like Nielsen’s The Gauge, could be negatively impacted. However, we believe the pattern will be similar to what we’ve seen in Latin America, with engagement growing over time as we continue to deliver a great slate of programming and borrowers sign-up for their own accounts,’ Netflix said.
Netflix shuffles top brass
Netflix has shaken-up its leadership team after announcing Reed Hastings has given up his co-chief executive role and become the company’s new executive chairman. That has seen chief operating officer Greg Peters promoted to co-CEO alongside Ted Sarandos.
That is significant considering Hastings was seen as the man behind product development and strategy. However, Peters said ‘there’s no big strategy shift or big culture shifts’ as a result of the management shuffle.
Meanwhile, the head of global TV Bela Bajaria has been promoted to become its new chief content officer, while Scott Stuber has been appointed as the chairman of Netflix Film.
What to expect from Netflix in 2023
Netflix is no longer providing guidance for subscriber additions each quarter and instead focusing on revenue and other financial metrics as a result of the introduction of new pricing tiers. However, Netflix did say it expect to report ‘modest positive paid net adds’ in the first quarter of 2023.
However, it did warn that subscriber growth could ease in the first quarter compared to the fourth thanks to seasonality, and said the introduction of paid sharing options will also distort additions throughout the year – stating that additions will be greater in the second quarter of 2023.
Currently, Wall Street believes Netflix can add 13.85 million subscribers over the entirety of 2023. Below is a chart outlining how markets believe subscriber numbers will fare throughout this year.
(Source: Estimates from Bloomberg)
‘We believe we have a clear path to reaccelerate our revenue growth: continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering,’ Netflix said.
Netflix said it expects to report 4% year-on-year revenue growth in the first quarter of 2023. Notably, the strong dollar remains a headwind considering growth will be double that at 8% at constant currency.
Investors will also be pleased to hear that Netflix is now targeting an operating margin of 21% to 22% in 2023 (this will equal an 18% to 20% margin at current exchange rates), up from its previous goal of 19% to 20% – although this will be negative in the first quarter thanks to the timing of content spending.
Netflix said it is past the most-intensive period of content spending now that it has scaled up over the last decade and this should lead to improved cashflow going forward, with the firm aiming to generate at least $3 billion in free cashflow in 2023.
Netflix earnings: What does Wall Street think?
Wall Street largely welcomed the stronger-than-expected results and the rosier outlook for 2023.
Analysts at Bloomberg Intelligence said ‘an expansion of its 2023 operating margin target to 21% to 22%, $3 billion in free cashflow and numerous catalysts on the horizon – including paid sharing as well as a ramp-up in ads – should fuel positive sentiment’.
‘All told, we believe investors will be encouraged by the subscriber beat and the 2023 operating margin outlook,’ said analysts at Citi.
Vital Knowledge said the update was positive, ‘but not spectacular’, adding that the news on the advertising business ‘is sanguine’.
Analysts at Third Bridge were also more cautious when it comes to the new catalyst for this year, stating the advertising business ‘will need to build some serious momentum in the coming months’. They also warned the news Hastings has stood down as co-CEO ‘raises a lot of questions about Netflix’s future strategy’.
A number of brokers raised their target price on Netflix this morning, including Piper Sandler to $325 from $270, Pivotal Research to $400 from $375, Jefferies to $400 from $385 and Credit Suisse to $291 from $271.
Where next for NFLX stock?
Netflix shares are trading over 7% higher in premarket trade today and are set to open at $338.25, which would mark its highest level since April 2021.
The update has provided the catalyst needed for the stock to break above the $333 level of resistance and to finally close the gap created nine months ago. The uptrend that can be traced back to last May remains intact. We could see it climb toward $356.80 if it keeps up the momentum, marking the level of support seen in early 2020, before eyeing a potentially larger move up to $396.50.
We could see $333 emerge as a new level of support but, failing that, the 50-day moving average has been providing a very loose form of support since last July but the 100-day moving average has proven more reliable. Notably, the 200-day moving average is currently aligned with the $250.30 level of resistance-turned-support seen throughout most of last year.
Take advantage of extended hours trading
Netflix released earnings after US markets had closed and this means most must wait until they reopen today before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.
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