The stock market has been full of surprises this year, including the emergence of artificial intelligence as a key narrative, the resilience of the U.S. economy, and the boom in big tech stocks.

Among the most unexpected winners this year is Netflix (NFLX 0.49%), the leading streamer, whose shares dove most of last year as growth slowed and it faced a new wave of competition from legacy media companies.

After losing more than two-thirds of its value over a six-month span in 2021 and 2022, Netflix has managed to flip the narrative -- the streaming stock is now up 44% year to date and 137% over the past year. Those gains have come for two primary reasons: the introduction of password-sharing fees and the launch of its ad-supported subscription tier. 

Both of those moves reflect changes the company has made to its longtime strategy. Let's take a look at the implications of each one to see if the stock can sustain its recent gains.  

The Netflix logo in several squares.

Image source: Netflix.

Paid sharing

Paid sharing is likely the most controversial move Netflix has made in a long time. The streaming service had long turned a blind eye toward password sharing as the company believed that it was a way of promoting its service. Management also seemed to think that password borrowers would subscribe directly to the service when they were ready.

However, Netflix's maturing user base seemed to convince the company to crack down on password sharing. Instead of essentially allowing unlimited sharing, Netflix has sent notices to its members telling them that their account is only for them and the people in their home. They can pay an additional $7.99 per month to share their account with someone who does not live with them.

Netflix implemented paid sharing in May, and the stock has jumped since the rollout, up nearly 20% since May 23, when it announced the new policy in the U.S. According to media reports, the move drove a spike in new subscriptions, and over the four-day period from May 25 to May 28, its new customer additions were higher than in any period since at least 2019.

Analysts have roundly cheered the move as well, seeing it as essentially 100% incremental profit as there are basically no costs associated with it. Netflix has yet to report earnings since it rolled out paid sharing, but we should get a sense of the impact when Netflix announces second-quarter results next month.

The new ad tier

While the password-sharing crackdown should give its bottom line a boost, the ad tier rollout is likely to give a longer-term lift to the business as it allows the company to tap into a new revenue stream and supplement payments from subscribers. 

Reed Hastings, who recently stepped down as co-CEO of Netflix, recognized this opportunity after long resisting advertising, as he noticed that advertiser demand was following TV audiences from linear TV to streaming outlets.

The vast majority of subscribers are expected to remain in the ad-free tier, but Netflix is using the ad-based tier to attract new subscribers. And it appears to be working. As of May, the company had added nearly 5 million subscribers to the ad-supported tier, just six months after the launch, and more than 25% of new subscribers are choosing the ad tier in markets where it's available.

Is the comeback for real?

Netflix's stock is still down significantly from its peak in late 2021, which came after the subscription boom early in the pandemic, so the recent resurgence should be viewed in that context.

The streamer now faces significantly more competition than it did just a few years ago, but many of its legacy competitors are focused on cutting costs in order to drive profits at their streaming businesses, which gives Netflix an advantage as it not only has a large audience to monetize its content spending, but it also has proven its profitability.

After the rally, Netflix stock trades at a price-to-earnings ratio of around 40 based on this year's estimates, which seems fair given its ability to gain operating leverage as it grows revenue. While I wouldn't expect another doubling of the stock, it should be able to hold its gains this time around.