After registering monster growth over most of the past decade, Netflix (NFLX -1.01%) hit a bit of a rough patch at the start of 2022. The business lost a combined 1.2 million subscribers in the first two quarters of 2022. Many investors consider this a new phase for the company after huge pandemic-fueled gains and rising competition.
With Netflix shares down a whopping 48% this year (as of this writing), should investors consider scooping up the top streaming stock as we look toward 2023? Let's take a closer look.
Netflix is adding subscribers again
In the third quarter, Netflix resumed its trend of bringing on new customers to the platform after losing members in Q1 and Q2 earlier this year. For the quarter that ended Sept. 30, the business added 2.4 million net new members, bringing the total to a staggering 223.1 million. The fastest-growing market continues to be the Asia-Pacific (APAC) region, which added over 1.4 million new subscribers in the quarter.
Revenue of $7.9 billion was up 5.9% year over year, and the operating margin was a healthy 19.3% in the three-month period. Both of these numbers exceeded the leadership team's forecasts. And the market appears to have turned positive on the company, as Netflix's stock price has soared 66% in the past six months.
For the current quarter, management expects sales to come in at $7.8 billion, translating to an increase of under 1% compared to Q4 2021. But Netflix forecasts 4.5 million net new members in the quarter. And for the full year, the video streaming giant projects itself to generate roughly $1 billion in free cash flow. In other words, that's the start of a more financially sound Netflix that produces plenty of cash in the years ahead.
Introducing a lower-cost ($6.99 per month), ad-based membership tier should boost financial results starting in Q4 and in 2023. Netflix launched this option in 12 markets this month, hoping to attract price-sensitive customers. Competitors like Hulu and Peacock already offered an ad-supported tier, so Netflix is late to the party. But the potential to spur growth is certainly there.
According to Nielsen data, Netflix accounted for 7.3% of TV viewing time in the U.S. in September. So, the platform is definitely a lucrative environment for advertisers looking to target a massive global audience in a digital format. Partnering with Microsoft, an enterprise with tremendous tech know-how, helps.
"[T]he initial demand that we're seeing is very strong," COO Greg Peters said during the Q3 2022 earnings call when discussing the potential of the ad tier. He continued: "[P]eople are very excited about the proposition of bringing their brands and their ads to a bunch of consumers around the world that are watching our shows."
A better macroeconomic picture in 2023 can propel ad sales for Netflix, too.
Netflix also hopes that its recent efforts to start cracking down on password sharing will bear fruit, especially since leadership believes there are an estimated 100 million households worldwide that do this. Even if a fraction of them convert to paying customers, Netflix's top line is set to rise even more.
Current valuation
After Netflix's stock got hammered this year, shares are now trading at a price-to-earnings ratio of 27, which is significantly lower than the trailing five- and 10-year averages. The argument can certainly be made that the Netflix of the next decade won't achieve the outstanding gains the Netflix of the past decade did when it seemed like annual revenue growth of 20% to 30% happened like clockwork. But the current valuation definitely looks attractive in the grand scheme of things.
Netflix remains the top dog in what has now become an extremely crowded streaming industry, with rivals all investing aggressively and competing for viewers' finite attention. Thanks to the company's first-mover advantage, Netflix benefits tremendously from massive scale and a huge content budget (roughly $17 billion in 2022) that allows it to continue releasing hit shows and movies. This should help Netflix maintain its lead in the years ahead.
The business has faced its fair share of criticism this year, and as a result, the pessimism surrounding Netflix's prospects hasn't been this high in a long time. For investors who can look past the company's recent struggles and adopt a long-term mindset, Netflix's stock could be a smart buy for the coming year and beyond.
