During the first and second quarters of 2022, Netflix (NFLX -0.63%) reported a combined loss of 1.2 million subscribers, a shocking occurrence for the streaming industry leader. After years of expansion, the reversal called into question the company's growth story, and its stock plummeted 76% just months after hitting a new all-time high.
As a result, management turned its attention to the estimated 100 million users accessing Netflix without paying. The ensuing crack down on password sharing has helped the company turn things around.
As Netflix leaned into that effort, shares have bounced back over 200% from their 2022 low. Is the streaming stock still a buy in the current bull market?
More strategic pivots
Netflix's leadership team first called out the 100 million password-sharing households in its Q1 2022 letter to shareholders. This was a gigantic revenue opportunity since these households were already Netflix users, and the hope was the business could convince them to pay for their own memberships.
Though management hasn't shared data about how many of those 100 million households have converted, co-CEO Greg Peters said on the latest earnings call, "We're excited to be at the point where we've operationalized that paid-sharing product work [...] it's integrated in everything we do."
Another surprising move was Netflix's decision to start offering an ad-based subscription tier. Many competitors had already introduced this option, something management long hesitated to do at Netflix.
But it was ultimately about providing consumers with more choices. Viewers who are price-sensitive, especially as Netflix continues to raise the cost of its subscriptions, have an option with the cheaper ad-supported model. Management said this tier registered 70% sequential membership growth in Q4 2023.
These strategic pivots helped Netflix deliver its best Q4 ever, adding 13.1 million net new subscribers to the platform.
Netflix also recently entered a partnership with TKO Group Holdings to stream WWE content starting in 2025. The 10-year deal will cost the streamer an estimated $5 billion in total but increase the appeal of its service with exclusive live content.
These moves demonstrate how the business is constantly evolving to try and drive growth, and this kind of adaptability is what shareholders want to see.
Investment considerations
Based on its better-than-expected Q4 results and surging stock price, Netflix has hit its stride once again.
The company has already proven it's head and shoulders above the streaming competition. While many rival services struggle to achieve profitability, Netflix continues improving in this regard. After expanding its operating margin 280 basis points to 20.6% in 2023, executives believe the business will further increase its margin to 24% this year. Netflix's scale advantages are becoming increasingly apparent.
The company is also forecasting positive free cash flow (FCF) of $6 billion in 2024. It repurchased $6.1 billion of stock last year, and shareholders can expect more buybacks going forward. This favorable financial position is something most Netflix critics never thought was possible.
Before you rush to buy the stock, it's critical you look at the valuation. Netflix shares currently trade at a price-to-earnings ratio of 47.1. On a forward basis, the multiple falls to 33.2. At first glance, this premium to the broad market may have prospective investors hesitating.
However, with revenue, profits, and FCF all growing at double-digit rates -- and accelerating -- Netflix's premium is arguably justified. Just remember to adopt a long-term mentality.
