2022 was a wake-up call for Netflix (NFLX -9.09%) shareholders, as the entertainment innovator got off to a rocky start, losing 1.2 million customers in the first six months of the year. Because this is easily the most closely watched metric for the business, it's no surprise the stock was down 67% between the start of 2022 and the day the company reported second-quarter earnings on July 19.
But with 2023 fully upon us, there's renewed optimism surrounding this streaming leader. The company recently reported that it added 7.7 million net new subscribers in last year's Q4. And that's a good reason to like the stock again. Let's take a closer look.
Posting a better-than-expected quarter
Netflix's 7.7 million customer additions exceeded not only management's internal forecast of 4.5 million but Wall Street's expectation of just under 4.6 million. What's more, revenue was up 10% on a constant-currency basis, totaling $7.85 billion.
So, it's no wonder the stock is up about 12% since that announcement on Jan. 19. Moreover, Netflix shares are up a jaw-dropping 57% over the past six months, a possible signal that shareholders are falling in love with the stock again.
In the U.S. and Canada, otherwise known as the UCAN region, Netflix added 910,000 new members during the three-month period, the most in any single quarter in the region since Q4 2021. As Netflix first launched streaming in the U.S. in 2007 and in Canada in 2010, this is easily the company's most mature geography, now with 74.3 million accounts as of Dec. 31. But with this number roughly equaling the total number of cable TV households combined in the two countries, it might be more difficult to continue posting user gains in the area going forward, particularly as competition keeps heating up. That makes Q4's numbers all the more impressive.
Investors should cheer at how broad-based the growth really was. Netflix added 3.2 million members in Europe, Middle East, and Africa; 1.76 million in Latin America; and 1.8 million in the Asia-Pacific region. The latter market could be Netflix's biggest long-term opportunity to continue bringing on more members.
India, in particular, is a country that the business has been investing heavily in to produce new content. With estimates for India to have a whopping 1.3 billion internet users by 2030, there's no wonder Netflix is focusing its efforts there. Plus, this strategic push will allow the company to better compete with Walt Disney's Hotstar and Amazon Prime Video, both of which dominate in India today.
Launched in November, Netflix's new ad tier is off to a strong start. The management team, which now features Ted Sarandos and Greg Peters as co-CEOs, said that subscribers to the ad-supported option were engaging with the service just as much as ad-free customers. They also mentioned that there was minimal activity in terms of downgrading to the cheaper option. This means that Netflix is well on its way to generating sizable incremental revenue from this specific offering. In fact, leadership thinks at least 10% of sales can come from the ad tier in the future, providing a new lever of growth.
Wall Street analysts predict Netflix's revenue to total $34.3 billion in 2023, which would show an 8.6% year-over-year increase. Even better is the company's projected profitability. Consensus estimates call for a 2023 operating margin of 19.1%, up from 17.7% in 2022. Additionally, Netflix executives believe the business will generate $3 billion in free cash flow this year.
Netflix now has nearly 231 million subscribers scattered across the globe. But it's hard to imagine the company's growth is nearing an end. According to data from the World Bank, there are approximately 750 million (excluding China, where Netflix isn't offered) broadband subscriptions worldwide. If Netflix can even penetrate half of this massive addressable market, shareholders have a lot to be excited about in the years ahead.
