strong subscriber growth sends the stock price soaring

In after-market trading, Netflix shares are higher by more than 7% after the company reported Q4 earnings. It signed up 13.1mn customers in Q4, which is significantly higher than the 8.9mn that analysts were expecting. This is also the best quarter of subscriber growth since the pandemic, when people were stuck at home with little else to do except watch Netflix. Subscriber growth was strong across the board, with 5mn of their new customers coming from Europe, the Middle East and Africa. As we have mentioned in prior notes, contributors to strong subscriber growth included the crackdown on password sharing and the strong demand for its cheaper ad-supported platform. Some analysts were skeptical of Netflix’s plan to irradicate password sharing, but its gamble seems to have paid off.

Solid numbers from Netflix

Earnings per share was $2.11, which is lower than analyst estimates of $2.23, however, revenue was higher than estimated at $8.83bn, which is up 12% YoY, and is the fastest pace of revenue growth for more than 2 years. Its operating margin also beat estimates at 16.9%, vs 7% a year ago and 14% expected by analysts. Free cash flow grew to $1.58bn, up from $332mn a year ago, and beating forecasts of $1.26bn. These numbers suggest that Netflix has upped its game and they justify the 43% gain in the stock price over the last 12 months.

Netflix cements its position as the only profitable streaming giant

Overall, these Q4 figures are stellar, and they are a reminder why Netflix is the only profitable streamer in the US. An earnings report like this will likely mean that it continues to lead the pack in a very competitive space. While these numbers will be cheered by the market in the short term, the medium-term outlook for Netflix’s share price will be determined by its 2024 guidance.

The future looks bright for 2024

Investors wanted to know if it can continue to grow subscriber numbers, what its content mix will be like and if it can remain profitable while producing content that competes with the likes of Disney, Paramount, Amazon etc.

The market may be pleased to hear that Netflix expects double digit revenue growth next year. However, this won’t be driven by record numbers of new subscribers; the company expects subscriber growth to moderate in Q1. Instead, revenue growth will be supported by rising prices for its services, which tend to be absorbed well by consumers. Free cash flow is expected to come in at $6bn this year, while operating margin for this year is expected to grow by 25%, analysts had expected 22.7%. Cash spend on content is expected to be $17bn, which is a huge number, but is to be expected when streaming companies need to have a continuous carousel of new shows and programmes to keep subscribers entertained and to attract new customers.

Weaker Q1 subscribers expected due to seasonal effects

After Q4’s blowout subscriber growth, Netflix expects subscriber growth to cool in Q1 2024, however they expect it to be higher than Q1 2023. So, there is mixed news on the future of subscriber growth. The market sems happy with this and the stock price has jumped by 7% in after-hours trading. It also announced that Q1 2024 EPS estimate is $4.49, which is higher than analysts had expected.

Netflix’s move into live streaming, and the exit of its head of film

It announced earlier on Tuesday that it had made a move into live entertainment and had paid $5bn for World Wrestling Entertainment’s ‘Raw’. This could help Netflix attract a new audience, with some limited potential for future subscriber growth, it may also set the scene for the company to expand into other live events in the future. Netflix also announced earlier this week that its head of film, Scott Stuber, would be leaving in March to start a new company. Stuber had wanted to cut back on the number of movies that Netflix made, so this could be a sign of a change in strategy from the company, and we may see a significant uplift in original movie content in the coming years. Stuber’s replacement has not yet been announced.

The market rewards winners

Overall, this is a strong start for the tech earnings season. Although Netflix is not one of the Magnificent 7, it is still seen as a bellwether for the tech sector, and the health of the US consumer. Tesla’s earnings are scheduled for release later this week. On the back of Tuesday’s earnings reports, the market will reward companies that beat earnings estimates like Netflix, however, they will punish companies that miss estimates or post negative future guidance, like industrial and consumer conglomerate 3M and healthcare giant Johnson and Johnson.