Based on the stock's move higher on Friday, Netflix's (NFLX -0.51%) fourth-quarter report impressed investors. While some key metrics for the period came in better than expected for the period, it may be management's outlook that is driving excitement for the stock on Wall Street. Netflix is optimistic about 2023, the quarterly update revealed. To sum up management's expectations, the streaming service specialist believes there is now a clear path to reaccelerating its revenue growth rate.
While there are a number of drivers the company anticipates helping drive its growth going forward, one key catalyst management referred to several times in its Q4 letter and earnings call was its nascent advertising business. Management expects this to morph into a major driver for the company.
Building an ad business
Launching its long-awaited, ad-supported tier in November, Netflix's new revenue stream is just a few months old. But a few months of history was enough for management to start forming some early estimates for how the business could perform.
While management avoided providing any specific guidance for its ad sales, Netflix Chief Financial Officer Spencer Neumann did note that he expects the company's advertising business to eventually grow to 10% or more of its sales mix.
"[W]e wouldn't get into a business like this if we didn't believe it could be bigger than at least 10% of our revenue and hopefully much more over time in that mix as we grow," Neumann explained.
With trailing-12-month revenue of $31.6 billion, management is expecting a multibillion-dollar business. Of course, the business should grow nicely over time as well. Furthermore, since its ad revenue will likely have a meaningful profit margin, it should be a good catalyst for profits, too.
Importantly, the company has been surprised by its customer engagement with the ad-supported plan, noting that it is better than what management had anticipated and impressively "consistent with members on comparable ad-free plans..." Additionally, management said that there's very little switching from other plans to the ad-supported plan, supporting the company's expectations for mostly incremental membership growth from its ad-supported tier.
Netflix expects double-digit revenue growth
Looking ahead, the company's advertising business is one reason management expects it can reaccelerate its revenue growth. Another key catalyst management anticipates contributing nicely to its top line is a crackdown on the free sharing of Netflix accounts across households for some subscribers.
"For the full year 2023, as we continue to improve our service, grow our advertising business and launch paid sharing," management said in the quarterly update, "we expect constant currency revenue growth to accelerate over the course of the year to double-digit rates and then sustain those growth rates for the foreseeable future."
Notably, Netflix is starting its revenue-growth reacceleration off of a small base rate. Q4 revenue increased just 1.9%. But the company's expectations for a reacceleration are already evident in Netflix's Q1 guidance. Management expects Q1 revenue to increase 3.9% year over year. Longer term, the company expects to return to double-digit top-line growth and ultimately sustain double-digit growth rates. Sustaining double-digit revenue growth is one of the company's "long term financial objectives," along with the company's plans to expand its operating margin and grow free cash flow.
While Netflix's budding ad business isn't the only way the company expects to return to double-digit growth rates and sustain them, it will likely play a key role. As management notes, the market for branded TV advertising is $180 billion annually in the more than 190 countries Netflix operates in.
