Netflix (NFLX -0.63%) is the world's largest streaming platform, and that is becoming more evident with each passing quarter. The company just reported its financial results for the fourth quarter of 2023, and it added 13.1 million subscribers, a record for the period.
Data source: Netflix. Chart by Statista.
Netflix now has over 260 million subscribers, which is significantly more than any of its competitors -- it's a whopping 110 million more than Disney's flagship Disney+ service, which is consistently a top-three streaming provider.
Below, I'll explain how the record result came about and discuss five things smart investors learned from the fourth-quarter report.
1. Mission accomplished: Netflix has fixed one of its biggest problems
Netflix battled with its account-sharing issue for years. Subscribers would often lend their password to friends and family members, which meant 100 million households around the world were using Netflix completely free of charge (according to the company's estimates).
In mid-2022, Netflix lost subscribers for the first time in 10 years, which prompted a crackdown on password sharing. Now, a subscriber's account will no longer work outside of their household. Instead, those on the standard ($15.49 per month) plan can add one extra member outside of their household for just $7.99 per month. Subscribers on the premium ($22.99 per month) plan can add two extra members for $7.99 per month each.
So, while the additional members are paying far less than full price for their subscription, it's better than nothing. This strategy was a key part of the company's huge subscriber increase in Q4.
In the quarterly shareholder letter, management said, "We believe we've successfully addressed account sharing," and it could help Netflix further penetrate its addressable market of 500 million connected TV households more effectively.
2. The advertising tier is becoming a major source of new subscribers
Besides forcing password sharers to pay, Netflix is trying to attract new users by offering a cheaper ad-supported subscription tier. The company launched it at the end of 2022 with a price point of $6.99 per month, and it has already amassed 23 million monthly active users. In fact, the ad tier is responsible for 40% of all new sign-ups (in markets where the ad tier is active).
The economics of advertising require scale to work. In other words, businesses won't spend their marketing dollars on a streaming platform with a small user base. They want to reach millions of viewers to increase their chance of a positive return on their investment.
Netflix's ad tier might be reaching that point, and in the middle of last year, management said it's already bringing in as much revenue per user as the $15.49-per-month standard tier. That implies Netflix is generating more than $8 in advertising revenue per user, per month, on top of the $6.99 subscription fee.
The company has only scratched the surface of its opportunity. It says there is $25 billion spent on connected TV ads every year, and considering Netflix accounts for less than 10% of the time people spend watching TV, there is plenty of room to grow.
Image source: Netflix.
3. 2024 could be Netflix's biggest year for content ever
The key to bringing in more advertising dollars is keeping users engaged with more content. Netflix plans to spend a whopping $17 billion on producing and licensing movies and TV shows this year, which is near a record high. Meanwhile, competitors are slashing their budgets as they struggle to match Netflix's scale and profitability. Last year, Disney revealed plans to cut around $4.5 billion from its content budget going forward.
With its competitors adopting a defensive stance, 2024 is a great time for Netflix to get aggressive and exert maximum pressure. The company is launching new seasons of smash-hit TV shows Bridgerton, Squid Game, and Formula 1: Drive to Survive. It's also releasing new shows featuring megastars like Sofia Vergara and Benedict Cumberbatch, as well as a series from the showrunners responsible for Game of Thrones.
Subscribers can also look forward to a number of exciting movies, including Eddie Murphy's return in Beverly Hills Cop: Axel F.
But Netflix made headlines recently when it announced a deal with TKO Group Holdings to acquire the global rights to World Wrestling Entertainment (WWE). Netflix will stream WWE Raw live every week in all major markets around the world. Outside the U.S., it will also show Smackdown and NXT, plus one-off live events like WrestleMania, SummerSlam, and Royal Rumble.
Reports suggest the deal is worth $5 billion over 10 years (to begin in Jan. 2025), and it's a milestone in Netflix's pursuit to deliver more live programming.
4. Revenue growth is accelerating
Given so much of Netflix's subscriber growth is coming from cheaper options like the ad tier and sharing offer, the company's revenue growth has been muted over the past year. For example, in Q2 2023, Netflix delivered an 8.0% year-over-year increase in subscribers but only a 2.7% uptick in revenue.
That gap has been closing. In Q4, subscribers grew 12.8% and revenue rose 12.5%, marking the fastest quarterly revenue increase in two years. There are a few reasons for that.
First, Netflix increased the price of its premium tier by $3 near the end of last year, so it's now pulling in more revenue from those subscribers. Second, Netflix eliminated its $9.99-per-month basic plan, so users seeking the cheapest option will have to go with the ad tier. As I mentioned earlier, the ad tier generates as much revenue per user as the standard tier, so while the user pays less, Netflix makes more.
Finally, the company should generate a growing amount of advertising revenue as more members sign up for the ad tier, making it more lucrative per user over time as it scales.
In its Q4 call with investors, management hinted more price hikes could be coming in the near future, so Netflix's revenue acceleration still has legs.
5. Netflix stock is expensive relative to the market, but it's still a buy
Netflix's Q4 results received a warm reception from investors, and its stock has jumped 16% since they were reported. Based on the company's $12.01 in earnings per share for full-year 2023 and a stock price of about $570, Netflix trades at a price-to-earnings (P/E) ratio of 47.
That's more than double the 22 P/E ratio of the S&P 500 index, and it's also more expensive than the 31 P/E ratio of the Nasdaq-100. In that context, Netflix stock doesn't look very attractive.
However, traditional valuation metrics aren't always a good indicator of whether you should buy a stock. Netflix has delivered a staggering return of 46,890% since it went public in 2002, and its 47 P/E is much closer to its cheapest-ever level than its most expensive.
In fact, Netflix hasn't always been profitable, so the P/E ratio wasn't even applicable during certain periods. If you avoided the stock purely because it wasn't trading at a cheap valuation relative to the broad market, you would have missed the chance to earn incredible returns.
Data by YCharts.
With that in mind, Netflix stock is worth owning for the long term because of the company's growing dominance in the streaming industry. Its pricing power will increase as its competitors continue to sputter, and its content catalog will only expand as more media companies have little choice but to license their shows and movies to the world's biggest platform.
