While this year was brutal for many corporations, some are looking forward to exciting developments in 2023 that could help reverse their fortunes. Take streaming giant Netflix (NFLX -3.92%), whose shares are down 48% in the past 12 months. The company is making important changes to its business, and some of those tweaks could meaningfully impact its financial results in 2023 and beyond. Let's consider why Netflix is a great stock to buy before the new year starts.
Subscriber growth taking a backseat
In the company's third-quarter letter to shareholders, Netflix's management relayed that starting with its next earnings release -- for the fourth quarter of 2022 -- it will no longer provide paid subscriptions guidance. Investors have used this metric for years as a bit of a proxy for the health and prospects of Netflix's business. When the company's actual paid additions came in above what it projected, its shares often jumped as a result; and the reverse happened when they came in lower than expected.
Once Netflix stops offering net paid additions guidance, the market will likely be less reactive to the number of paid memberships it reports. More importantly, the move signals that for Netflix, user growth -- while not insignificant -- has become substantially less important than it was in the past decade. With around 223 million paying members as of the end of the third quarter, the company is increasingly focused on squeezing more money out of its existing ecosystem.
And Netflix is finding ways to do just that.
Expect stronger revenue growth, eventually
In the third quarter, Netflix's average revenue per member increased 1% year over year, although putting aside the impact of currency exchange dynamics, it jumped by a more impressive 8%. Netflix's recent initiatives will help it boost this metric. In November, it introduced a low-priced ad-supported subscription option to help attract price-sensitive customers.
Running ads won't make a massive difference in Netflix's results immediately, but it could eventually make a meaningful contribution to the company's top line. Next year, Netflix will introduce a solution to its password-sharing problem by making account holders pay a fee for sharing their accounts with friends or family members who don't live in the same household.
Netflix estimated that 100 million households are accessing the platform for free, and this new option could help the company get some money out of them starting in 2023.
Streaming is taking over, and Netflix will benefit
Netflix's long-term opportunity depends on its ability to replace broadcast and cable. How much whitespace is left here? Although the cord-cutting trend has been going on for a while, it will likely still be decades before streaming really takes over. Consider demographic differences in cable viewership. Last year, 81% of U.S. adults aged 65 or older had cable, compared to just 34% of those aged 18 to 29, the lowest of any age group.
Old habits die hard, and older generations have been watching cable for decades. They are unlikely to stop doing so altogether. But younger people are growing up in a world where streaming is becoming the primary mode of watching content. So it's reasonable to assume cable and broadcast will eventually be phased out. Note that the U.S. and Canada are Netflix's most penetrated markets. Cable viewership is even higher in most other countries.
That's where Netflix's long-term opportunities lie. In addition to its newer initiatives to boost revenue, it will keep doing things that have made it so successful. That includes Netflix's content strategy. The company has become one of the most successful studios, as evidenced by its many awards. That's not an accident. Netflix has access to a wealth of data on user preferences that allows it to figure out which kinds of shows and movies are likely to be popular with subscribers.
Further, the streaming specialist is generating stronger free cash flow, some of which it will reinvest into the business to support its expensive original content strategy. In the third quarter, Netflix's free cash flow came in at $472 million, compared to negative cash flow of $106 million in the year-ago period. Netflix has set the foundation for a successful and exciting future. Many investors don't seem to have recognized it yet, which is why its shares are down nearly 50% this year.
But the tech company is likely to prove the doubters wrong. Those with the foresight to purchase shares while they're down and the patience to hold them through heightened market volatility will reap the benefits.
