Why Netflix stock is up big today

Jacob Wolinsky ValueWalk

Netflix (NASDAQ:NFLX), the world’s largest streaming service, continued its strong run with fourth-quarter results that displayed its sixth straight quarter of increased subscriber numbers.

Netflix posted strong gains in revenue and earnings in the quarter and gave an outlook that suggested more of the same in the near term. As a result, the company’s stock price was up some 13% in early trading on Wednesday, hitting $558 per share.

The most net new subscribers since the pandemic

Netflix’s subscriber numbers have grown since it added a cheaper, ad-supported tier in November 2022. That growth has been particularly robust since the company’s crackdown on password sharing in May.

In fact, the fourth quarter was the best quarter for net new subscriber additions since the start of the pandemic, as Netflix added 13.1 million subscribers in the quarter, compared to the third quarter. Further, Netflix’s 260 million paid subscribers is 12.8% more than it had in the fourth quarter of 2022.

Over the past three quarters and since the password-sharing crackdown, Netflix has added 5.9 million, 8.8 million, and 13.1 million subscribers, totaling just under 28 million. It also has had six straight quarters of net new subscriber increases dating back to Q3 of 2022, when the ad tier launched.

“So, we’re really thrilled with our engagement trends domestically and globally. This is really a story about viewing moving from linear television to streaming,” said Co-CEO, President, and Director Theodore Sarandos on the earnings call. “Our engagement is a bit impacted by our paid sharing. Think about it like fewer households using the same account. So as those folks spin off and get their own accounts, and we win them over with our programming, that will normalize and continue to grow.”

With more subscribers comes more revenue as Netflix saw its revenue increase on a quarterly basis for the fifth straight quarter, surging to $8.8 billion in Q4, a 12.5% year-over-year increase. The company’s revenue was boosted by the addition of subscribers and price hikes for its basic and premium plans.

The company’s net income came in at $938 million or $2.11 per share, up from $55 million in the fourth quarter of 2022. However, while Netflix’s revenue beat earnings estimates, its net income fell short due to a $239 million foreign exchange re-measurement on euro-denominated debt.

More growth ahead

Netflix anticipates another strong performance in the first quarter of 2024, as it projects $9.2 billion in revenue this quarter, a 13% year-over-year increase, and $1.98 billion in net income, which would be up from $1.3 billion in Q1 of 2023.

For fiscal 2024, the company expects double-digit revenue growth and continued increases in membership, with the goal of making ads a more substantial revenue stream to provide more sustained, consistent income.

Co-CEO Gregory Peters said Netflix currently has 23 million monthly active users (MAU) on its ad-supported tier, and that increased about 70% from the previous quarter. The ad-supported plan now accounts for about 40% of new sign-ups where it is available, and Peters sees that continuing to grow.

“There’s not a magic MAU number, but I think it’s fair to say that we’ve still got plenty of room to grow in all the markets that we operate in,” Peters said.

At the same time, Netflix is phasing out its basic plan, so the goal appears to be to move more people to the ad tier while keeping the standard and premium packages.

Netflix is also looking to bolster its roster of live events. That initiative received a boost when the company announced a partnership with WWE and TKO Group Holdings (NYSE:TKO) on Tuesday, which will bring WWE’s weekly wrestling show, Raw, to Netflix starting in 2025.

“WWE Raw is sports entertainment, which is right in the sweet spot of our sports business, which is the drama of sport. Think of this as 52 weeks of live programming every week — every year. It feeds our desire to expand our live event programming,” Sarandos said on the call.

Netflix is trading at around 40 times earnings with a forward price-to-earnings ratio of 30, so its valuation is decent given its growth potential.

Author

Jacob Wolinsky

ValueWalk

Jacob Wolinsky is the founder of ValueWalk, a popular investment site. Prior to founding ValueWalk, Jacob worked as an equity analyst for value research firm and as a freelance writer. He lives in Passaic New Jersey with his wife and four children.

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