What happened

Shares of Netflix (NFLX 0.00%) moved sharply higher on Thursday, surging by as much as 9.8% in morning trading. As of 12:44 p.m. ET, the stock was still up 8.8%.

The catalyst that drove the streaming video pioneer higher was news that after a slow start, its ad-supported tier is now making serious headway with subscribers.

So what

Netflix's lower-cost Basic with Ads plan is finally hitting its stride, according to an article published by Bloomberg. The plan has attracted more than 1 million users after just two months, according to internal documents. 

Perhaps equally importantly, Netflix also surpassed the milestones it set with advertisers, delivering the requisite number of viewers necessary to fulfill its contractual obligations, according to the article, which cited "people familiar with the deals." Its ad-supported plan user base grew by more than 500% in the first month after its launch and another 50% in the second month.

Earlier reports suggested that Netflix was initially forced to give some money back to advertisers when the number of viewers it expected didn't materialize. Netflix stock fell on fears the ad-supported tier wouldn't be the growth driver investors had hoped. The news wasn't all bad. Netflix said fears regarding customers trading down from higher-priced tiers were unfounded, as most of its subscribers have remained on their existing plans. 

Now what

At this point, Netflix's lower-priced ad-supported tier won't have a meaningful impact on the company's revenue. With roughly 1 million viewers per month, that amounts to roughly $84 million in annualized subscription revenue -- a drop in the bucket compared to the $31.6 billion in total revenues it generated in 2022. 

That said, it's still early days for the company's advertising business, and every new customer who subscribes drops additional profits to the bottom line.

Furthermore, after years of cash burn, Netflix turned cash flow positive in 2022, generating $2 billion in operating cash and $1.6 billion in free cash flow. Management expects its financials to improve further this year, guiding for at least $3 billion in free cash flow. Now that Netflix has passed the tipping point, it will likely become a cash-generating machine.

That's just one of many reasons Netflix stock is a buy.