In the face of decades-high inflation and the worst stock market downturn since 2008, Netflix (NFLX -0.63%) was largely written off by investors. The stock plunged 51% in 2022, marking its worst showing since 2011. Investors were skittish, and with good reason. Revenue edged just 6% higher for the year, while net income slumped 12%.
What a difference a year makes. Netflix just turned in its fourth successive quarter of accelerating subscriber growth, closing out 2023 in fine fashion. Not only that, but by some accounts, the company delivered its best-ever fourth quarter, silencing some of its most vocal critics. The results provided additional evidence that Netflix's growth is far from over.
How did the company mount a comeback for the ages? Let's take a look.
Image source: Netflix.
Netflix subscribers: 260 million strong
One of the most closely scrutinized metrics among Netflix investors is its subscriber numbers, and the company did not disappoint. The streaming pioneer added 13.1 million subscribers in Q4, up 13% year over year. This marked its best performance since the pandemic-fueled surge of 15.8 million net additions in 2020's Q1. It was also well ahead of analysts' consensus estimate of 8.69 million. This brought Netflix's total subscriber count to more than 260 million.
Management credited several factors for fueling the company's extraordinary subscriber growth. First, Netflix continues to reap the benefits of its password-sharing crackdown. The company's paid sharing plan allows users to share their account with people living outside their households for an additional fee. Co-CEO Greg Peters said on the call the crackdown "will improve our growth for years." The company also credits a strong slate of content for helping drive demand.
To a lesser extent, subscriber growth was fueled by the Netflix with Ads plan, the company's cheaper, ad-supported tier. In a recent interview, advertising president Amy Reinhard revealed the ad-based plan had surpassed 23 million global subscribers. Management expanded on Tuesday, saying ads membership increased 70% quarter over quarter, and "[t]he ads plan now accounts for 40% of all Netflix sign-ups" in markets where the plan is available. This illustrates that there is still untapped demand for its lower-priced offering.
Subscriber surge drives a strong financial showing
The continuing surge in subscriber growth provided a boost to Netflix's financial results. Revenue of $8.8 billion grew 13% year over year, while earnings per share (EPS) of $2.11 surged more than 16-fold. To give those numbers context, analysts' consensus estimates were calling for revenue of $8.72 billion and EPS of $2.22, so Netflix surpassed top-line expectations while coming in shy on profits. It's worth noting that the shortfall on the bottom line was the result of a non-cash loss related to its currency hedging, so investors are likely to give that a pass.
Other metrics were equally compelling. Netflix's operating margin of 16.9% more than doubled from 7% in the prior-year quarter. For the full year, the company grew its operating margin to 21%, up from 18% and ahead of its target of 20%. Expanding margins not only improved its net income but also helped drive stronger free cash flow to $6.9 billion, up from $1.6 billion in 2022.
The future looks bright for Netflix
Netflix also revealed that beginning in January 2025, TKO Group Holding's WWE's Raw will begin streaming live exclusively on Netflix in the U.S., Canada, the UK, and Latin America, while other countries and regions will be added over time. Additionally, Netflix will be home to WWE shows outside the U.S., including SmackDown and NXT, as well as premium live sporting events, including Wrestlemania, SummerSlam, and Royal Rumble.
If the company's outlook is any indication, Netflix's growth spurt is expected to continue. For Q1, management is forecasting revenue of $9.2 billion, an increase of 13% year over year, while EPS is expected to grow 56% to $4.49.
The results suggest that investors were too quick to abandon Netflix, which has proven there are still levers it can pull to boost growth. That's why the stock is still a buy.
