It was a good start to this critical earnings season if you're a Netflix (NFLX 9.71%) shareholder. Shares of the streaming service soared after a blowout financial update shortly after Tuesday's close. Netflix hit levels it hasn't reached in 24 months. But history can be cruel.
The last time Netflix stock traded this high -- two years ago -- it plummeted 70% over the next four months. Did it do enough this time to make sure things can be different this time? Let's go over some of the reasons the stock is moving higher after this week's fourth-quarter report. Let's also see if it's enough to keep the rally going.
NASDAQ: NFLX
Key Data Points
1. Life after Reed Hastings will be fine
Founder and longtime helmsman Reed Hastings stepped down in January of last year. It was part of a calculated retreat from the corner office. He had promoted programming and content guru Ted Sarandos to serve as co-CEO in the summer of 2020. It was time to move on.
The stock initially moved higher after Hastings' departure, but would investors have faith in a company that would be without Hastings at the top for the first time in more than two decades? Well, Netflix is doing just fine, 12 months after he stepped down. The stock soared 65% last year. On Tuesday we learned that revenue accelerated in 2023, posting double-digit growth in the latest quarter for the first time in two years.
Image source: Getty Images.
2. Higher prices aren't hurting subscriber growth
Netflix is now serving more than 260 million paid members worldwide. It has been raising prices almost every year, including bumping the rate for its costliest subscription tier higher in early November. That move follows cracking down on password sharing. Despite the perpetually rising cover charge in the face of desperate rivals, Netflix isn't afraid to flex its pricing elasticity.
And it's working. Netflix closed out 2023 with 13.1 million more subscribers than it had three months earlier. It's the platform's largest increase in paid memberships since the first quarter of 2020, when the world was hunkering down in front of the TV to ride out the initial wave of the COVID-19 crisis.
Despite the growing popularity of its new ad-supported tier at a discounted price, revenue is keeping up with subscriber growth over the past year. It's hard to argue when Netflix is handling the pricing gun like it's Annie Oakley.
3. Guidance is strong
A strong quarter wouldn't translate into sustainable upticks if the view through the windshield didn't look as promising as the one in the rearview mirror. Netflix is eyeing a record $9.24 billion in revenue for the new quarter, a 13% year-over-year increase. That would translate into a third consecutive quarter of accelerating top-line growth, and its strongest revenue gain since the final frame of 2021.
Widening margin finds the outlook even more encouraging on the bottom line. Its fresh guidance for the first quarter calls for operating income and net income to soar 41% and 51%, respectively. The $4.49 a share it's targeting in earnings for the period is well ahead of the Wall Street consensus of $4.10. Even the rosiest of the two dozen bottom-line forecasts is below where Netflix now stands.
4. Netflix will keep returning money to shareholders in its own way
Tuesday's report hit a juicy milestone: Netflix has now been profitable for 20 consecutive years. Most of the competition is still trying to get out of the red. It generated $6.9 billion in free cash flow for all of 2023.
Netflix is willing to return some of its good fortune to shareholders, but it isn't likely to start shelling out a quarterly dividend anytime soon. Its preferred path to payback is repurchasing shares. It spent $2.5 billion to buy back 5.5 million shares in the fourth quarter. Some companies repurchase shares to offset their stock-based compensation, but Netflix is making a dent here. Its share count has declined by 1% over the past three months and 2% over the past year.
Don't worry about the critics arguing that Netflix is wrong to be buying back its stock as it's hitting two-year highs. Netflix has been buying on the way up. It will also help profitability on a per-share basis, at least slightly, as it enters what should be its 21st year of profitability.
5. Netflix is putting a ring on it -- a wrestling ring
Apologies to The Rock, but can you smell what the Netflix is cooking? Hours before its monster quarter, Netflix announced a partnership with WWE that will bring the wrestling federation's Raw live show exclusively to the streaming platform in the U.S. and other key markets next year.
It's a win-win pairing. The WWE will benefit from Netflix's unmatched global reach to expand its presence, and Netflix will nab a sports entertainment presence that will keep a huge audience glued to their subscriptions.
Let the rest of the streaming services stocks fight it out in a cage match that will end with bruises, exits, and consolidation. Netflix just keeps winning.
