If you look at Netflix's (NFLX 1.05%) recent stock performance, you'd think the movie streamer's business is booming. Shares are up 24% in the past month and 62% over the past six months, and they've more than doubled from the lows they hit last May.
Yet revenue was meager in the fourth quarter, profits collapsed, and Netflix suffered its slowest year-ending subscriber growth in over a decade. That isn't a performance that should elicit such a riotous response in its stock. And now founder and CEO Reed Hastings is stepping aside to take on the role of executive chairman, marking the end of an era for the streamer.
Without question, Hastings made Netflix into an industry powerhouse, but this next phase comes at a turbulent time for media companies. Investors need to figure out if this changing of the guard will allow Netflix to return to a growth story -- or are the 30,000% gains since its IPO the best investors can hope for?
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Nothing is the same
Co-CEOs Ted Sarandos and Greg Peters are replacing Hastings. While not a new situation for Netflix -- Sarandos has served as co-CEO with Hastings since 2020 -- conventional wisdom says sharing the top spot is a bad idea. Yet a Harvard Business Review study shows companies with co-CEOS actually outperformed those with a single chief executive, 9.5% to 6.9%, with nearly 60% of the companies with shared top-level responsibilities doing better.
However, Netflix's own co-CEO track record is a disappointing loss of 32% in shareholder value, and while two heads may be better than one, too many cooks can also spoil the broth.
But Netflix has bigger problems than how many people are steering the ship. It's possible the industry may have reached its peak, as with so many options to choose from, consumers are more discerning about which streaming video service they sign up with. Netflix is no longer an obvious choice for every media-streaming consumer.
A decade of pursuing quantity over quality in original programming has caused Netflix to rank dead last in customer satisfaction polls for perceived value. Moreover, analysts at SVB MoffettNathanson recently came to the conclusion that streaming is not the business it once was, and many will no longer be able to engage in quixotic pursuits of profits that do not exist.
For many players, they wrote, "cash flows are sorry ghosts of their former selves. Balance sheets are loaded with debt in a higher interest rate environment. Rather than being the new sliced bread, investors and executives have accepted that streaming is, in fact, not a good business -- at least not compared to what came before."
An improving financial picture
Nevertheless, that's not the picture Netflix sees. It ended the year with $1.6 billion in free cash flow (FCF), ahead of its projection of $1 billion, and forecasts it will end 2023 with $3 billion in FCF. That should allow the streamer to begin buying back its stock.
It does have $14 billion in long-term debt, at the high end of its targeted $10 billion to $15 billion range, but it also has $6 billion in cash and short-term investments.
Sarandos maintains streaming is still in its infancy, as it only accounts for 8% of TV time, even after all these years, indicating there is plenty of room for growth still. The key is content. "When the content is working, the business is working. We grow engagement. We grow revenue. We grow profit."
That could prove difficult for Netflix. While the streamer is now focusing on higher-quality content and had some of the most-viewed shows on television last year, it wasn't able to garner many new subscribers though it spent a lot of money to get them.
Netflix's marketing expense in 2022 was $2.53 billion on 8.9 million net new additions, or about $284 each. Obviously, some of that money goes to retaining existing customers, but it's an expense that's climbing as Netflix spent $140 per net addition in 2021 and just $60 in 2020 (of course, with pandemic lockdowns, streamers didn't need to do much marketing at all to get viewers to sign up).
Image source: Getty Images.
Throwing ideas at the wall
The jury is out, though, on some of Netflix's latest initiatives. For example, the ad-supported subscription tier that launched in November got off to a slow start, with initial reports saying Netflix was forced to return money to advertisers because the promised views didn't materialize.
Peters, however, maintains the ad-supported tier can eventually account for 10% of revenue and that it can be as big as Disney's Hulu, which generates over $1 billion annually.
Netflix is also trying its hand at gaming, fitness streaming, and livestreaming events. Some of these are too new to draw conclusions, but it suggests that even Netflix is convinced streaming movies alone can't carry the company anymore.
The ship has sailed
With competition for eyeballs fierce, profits plunging, membership growth at its lowest point in years, and new ventures at best mixed, Netflix would seem a tough call as a buy. Whatever good news the streamer shared in its quarterly earnings report seems to be already priced into the stock. At 36 times earnings, 4 times sales, and 222 times the free cash flow it's generating, Netflix stock isn't cheap.
While the streamer looks to be financially sound, investors would be best served to wait for more clarity on whether it can regain its status as a growing business once more before buying Netflix stock.
