The streaming wars continue to rage on, with Netflix (NASDAQ:NFLX) at the forefront. As the market leader in streaming services, Netflix still wants to expand its reach so that it can continue to dominate the industry amidst new waves of competition. With a vast library of content, exclusive deals with content creators and producers and more, Netflix sets the standard for streaming services.
Despite subscriber losses in the first part of 2022, Netflix has once again proven its resilience against the competition by exceeding expectations in its fourth quarter earnings. While its earnings fell short of analysts' predictions, Netflix's fourth-quarter 2022 financial results were still impressive. The company surpassed revenue, operating profit and membership growth expectations.
Apart from these operating results, Netflix also announced a major leadership change. The streaming giant's longtime CEO and founder are stepping away from this role and will take on the title of executive chairman.
The stock price is up 15% since the start of 2023, leading to a price-earnings ratio of approximately 34. Throughout its history, Netflix's shares have been much more expensive than this, but that was due to continuous growth that has now been interrupted.
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Still, Netflix has big plans for the future and is laying out an impressive strategy to get back to double-digit growth. With its aggressive plans and strong content library, it seems hard to think there will be a sustained downturn for Netflix shares in my opinion.
Netflix delivers another healthy quarter
Netflix stock gained about 8.5% after its latest earnings report showed that despite missing analysts' predictions on earnings revenue was as expected and subscriptions exceeded expectations.
Earnings per share were only $0.12 instead of the anticipated $0.45, and revenue was clocked at $7.85 billion. Netflix added 7.66 million paid customers in the fourth quarter, more than the 4.57 million Wall Street predicted.
This quarter marks the inclusion of Netflix's ad-supported service in the earnings results. The launch of this lower-priced option was in November, but there is no information yet on how many users have chosen this plan.
During its pre-recorded earnings call, Netflix reported similar engagement from its new subscribers who have opted for the ad-tier plans as it has seen with regular customers. The company stated that there hadn't been many people switching plans. Thus, the more expensive premium models are still being subscribed to. This indicates that many customers are content with the costlier version and not choosing the cheaper ad-supported model.
In terms of year-over-year comparisons for the fourth quarter, results were mixed. The year-over-year revenue increase was less than 2%. The operating profit margin declined to 7% and the net profit dropped by 91%. However, Netflix saw a considerable improvement in its financial health, generating $332 million in positive free cash flow compared to the $569 million in cash flow losses from the previous year. Overall, the strong subscriber number led to the tapering of negative sentiment.
For full-year 2022, Netflix acquired an impressive $31.6 billion in revenue, a 6% increase from the previous year. On the other hand, the operating profit margin dropped 310 basis points compared to 2021. In addition, earnings per share fell 11% to $9.95. Despite this, Netflix generated a positive free cash flow of $1.6 billion in 2022, which is a huge improvement compared to the cash flow loss of around $132 million it reported in 2021.
Looking ahead, Netflix is forecasting steady, healthy returns. In the short term, Netflix expects modest revenue and subscriber growth in the first quarter of 2023. However, its long-term goal is to get back to double-digit revenue growth, increase its profit margin and expand its free cash flow. For 2023, the target is to achieve $3 billion or more in positive free cash flow - a growth rate of approximately 100%.
All in all, Netflix had a highly successful quarterly earnings report, further creating favorable sentiment amongst investors. Over the past six months, the stock has seen an impressive growth of more than 55% on recovery from the epic fall in its valuation caused by the first-ever net subscriber loss. The outlook appears favorable, as the market is showing increasing strength, inflation is slowing and the Federal Reserve has become more moderate in its approach.
Change at the top will not hurt much
Reed Hastings, the founder of Netflix, has decided to step down as co-CEO but will continue to serve as chairman of the company. Ted Sarandos will stay on as co-CEO, and Greg Peters, formerly Chief Operating Officer, will fill the other co-CEO position vacated by Hastings. Peters additionally has been invited to the company's board.
In a recent tweet, Hastings stated his intent to stay as executive chairman of the company for "many years." This news comes when Netflix attempts different strategies to draw more subscribers and maintain its position in a tough market.
Further significant changes have also been made at the top of the Netflix hierarchy, with Bela Bajaria now taking on the role of Chief Content Officer and Scott Stuber assuming charge as Chairman of Netflix Film. Bajaria formerly served as the global head of television, while Stuber was the head of the global film.
Netflix had a strong showing in the fourth quarter. This was a major positive for investors concerned about slowing growth due to increasing competition from other streaming services.
In addition, Netflix is projecting healthy returns. Coming out of earnings season, it is in a great position. Its focus is shifting towards the classic television model, which involves creating plenty of content, advertising it and striving to achieve success with its audience. All this should keep both subscribers and advertisers happy for the foreseeable future.
This article first appeared on GuruFocus.