With Netflix's (NFLX 0.68%) year-over-year growth rate in net new paid members over the trailing-12-month period slowing to 4% -- down from 9% in 2021 and 22% in 2020 -- many investors are likely hoping the streaming-TV giant's subscriber trends can improve in 2023. With the company's COVID-19 sheltering pull-forward in demand in 2020 now further in the rearview mirror, reacceleration of subscriber growth may finally be in store for the company again this year.
With the streaming-TV company's fourth-quarter earnings report scheduled for next Thursday, Jan. 19, investors will get some useful insight into management's expectations for the year. Ahead of that report, here are some things to think about when it comes to expectations about the company's subscriber trends.
NASDAQ: NFLX
Key Data Points
Stronger member growth is likely
While there's no way to know exactly what Netflix's subscriber growth will look like this year, management seems to expect a better year than 2022. Netflix founder and CEO Reed Hastings hinted in the company's third-quarter earnings call that there are some catalysts for more robust subscriber growth in 2023.
"Everything the company is focused on, whether that's on the content side, on marketing, lowering prices [with the launch of ad-supported tiers], the paid sharing, the thoughtful approach we're doing there lines us up for a good next year," Hastings explained, ... "[other than foreign exchange headwinds], all the stars are lining up very well for us."
There does seem to be some momentum picking up. Management's guidance for 4.5 million new paid members in Q4 marks a significant sequential uptick compared to the 2.4 million it added in Q3. Further, the company's third-quarter additions were a significant improvement from the 1 million subscribers the company lost in Q2.
This momentum, combined with Netflix's recent rollout of ad-supported tiers at lower price points and the company's efforts to crack down on password sharing, suggests 2023 subscriber growth will likely be stronger than it was last year.
Revenue could reaccelerate, too
With all of this said, investors focusing too much on subscriber growth may miss an even more important metric to watch: revenue growth. Starting in 2023, Netflix's revenue growth may become more important than subscriber growth. Why? Because the success of the company's new ad-supported tier should be measured, first and foremost, by how much revenue it is contributing to Netflix's business.
Consider that the revenue Netflix generates from its subscription-only tiers is limited to the price the company charges those subscribers. But revenue from its ad-supported tiers can grow well over the subscription price as marketers bid for ad spots, driving up advertising revenue. Netflix can also grow its advertising revenue over time by increasing the number of ads shown per hour of viewing (ad load).
When it comes to Netflix's revenue growth, a reacceleration is extremely likely. The company's efforts to increase subscribers and the rollout of an ad-supported tier will both help drive revenue.
When asked about Netflix's priorities on Dec. 16 during the UBS 50th Annual Global TMT Conference, Netflix co-CEO Ted Sarandos noted that one key theme for the company this year is an expectation to "reaccelerate revenue growth." The pieces do seem to be in place for this to occur. Investors will get more insight into what management expects from the year after the market closes on Thursday, when Netflix reports its fourth-quarter results.
