Netflix (NFLX -0.51%) had a terrible first half of 2022 as worries over high inflation, declines in paid new subscribers, and significant year-over-year revenue deceleration plagued the company and led to substantial stock declines. However, after the company beat its third-quarter forecasts for revenue, operating income, and earnings while reestablishing subscriber growth , the stock rose 22% to end the year.
Does the stock's recent rise indicate Netflix's 2022 troubles are over and it's about to regain its mojo in 2023, or are there still dark times ahead?
Several issues investors worried about in 2022
The company's poor fundamentals in 2022 are the result of four concerns. The first issue is that Netflix relies on connected TV (CTV) growth and TV viewers' adoption of streaming -- both of which slowed during the year.
The second issue is that Netflix's 222 million paying customers shared passwords with 100 million non-paying households -- a considerable loss of potential revenue. And although account sharing as a percentage of paying members remained stable over many years, slowing adoption of CTV and on-demand viewing equates to slowing user growth in the current environment.
The third issue is growing competition from traditional entertainment companies like Walt Disney, Paramount, and others that now realize that streaming is the future. As more companies provide great viewing alternatives, Wall Street fears Netflix will lose subscribers and market share.
Last, high inflation, rising interest rates, a strong dollar, and a possible recession provide an atmosphere where few U.S.-based companies have managed to perform well.
But it has a solid competitive position
While streaming has growing competition, the opportunity is significant and rapidly expanding.
For instance, Netflix only made up 6.6% of a global video streaming market valued at $473.39 billion in 2022. Fortune Business Insights predicts this market will grow at a compound annual growth rate of 19.9% to $1.69 trillion by 2029. Plus, Netflix management believes there is $180 billion in the branded advertising opportunity and an additional $130 billion to tap into in the gaming market.
Therefore, this company has plenty of room to grow its market share and the ability to do so.
It has an extensive global subscriber base from which it gathers significantly more data than competitors. And it feeds this data into a sophisticated artificial intelligence engine that helps it determine the best TV shows and movies to produce, as well as which of these shows to recommend to individual members. As a result of having an abundance of content that viewers want to see, Netflix maintains the highest market share in the streaming industry.
Another factor favoring Netflix is that building a streaming business is difficult and expensive. As a result, many of the newer players in the streaming industry will likely fail to achieve profitability and will eventually disappear as competition. Yet, Netflix has already become profitable.
For instance, it is producing between $5 billion and $6 billion in annual operating profit, while its competitors' combined 2022 operating losses were over $10 billion.
NFLX Operating Income (TTM) data by YCharts
So, despite its recent difficulties, Netflix has substantially more resources to continue investing in more and better content than most of its competitors. Thus, it will likely grab additional market share in this down market.
New revenue growth initiatives
Netflix has added two additional revenue streams: paid sharing and advertising.
The company will monetize password sharing by allowing only one home per Netflix account. The streaming service will charge that account a nominal fee for each additional home that shares the password. This solution should start rolling out to most countries in early 2023.
In November 2022, the company started a lower-tier service, Basic with Ads. This new tier will initially be available in 12 countries and is priced 20% to 40% below the Basic starting price. Over time, this membership option should attract more price-conscious members.
These initiatives should create additional revenue and profits for the company, although it likely will take beyond 2023 for these new ideas to mature and pay off.
However, some things are beyond its control
The poor macroeconomic environment is beyond Netflix's control.
The company's ability to reaccelerate revenue greatly depends on central bankers conquering inflation and lowering interest rates. Unfortunately for investors, many experts expect the economy to rebound in 2024 or beyond. So suppose you are considering investing in this company, hoping it will regain its mojo in 2023. There is a decent chance you will be disappointed as returns might be lackluster this year.
Only patient investors willing to wait out a downturn that could last several more years should invest in Netflix today.
