Netflix’s Q4 2023 results convinced Wall Street that the company possesses a range of competitive advantages, making it incredibly hard for contenders to topple it from the throne.
Netflix has nearly 261 million streaming subscriptions, adding 13 million new users in the fourth quarter of 2023. This beat subscription forecasts by almost 50%.
The number of paying customers indirectly increased due to changes in password sharing policies, which were initially badly received. However, it’s clear from the numbers that Netflix subscribers are returning. The exponentially growing user base means increasing profits from gradual monetization.
“Netflix is a specific Wall Street company because for investors, not only hard financial data, such as revenue and earnings per share, matter, but the customer base is especially important,” explains Michał Stajniak, an expert at XTB, in an interview with MarketNews24. “In terms of customer growth, Q4 2023 was the company’s best ever, even though Netflix is raising its prices.”
It’s no wonder the market turned a blind eye to weaker-than-expected earnings. The game is about the future. The first reaction to the report was a nearly 10% increase in the company’s share price at the opening of the session on Wall Street, adding over $20 billion to its market capitalization, bringing it to $215 billion. The panic that took place in 2022 turned into euphoria.
The company’s phenomenal success lies mainly in the platform and the management’s actions, which were able to scale Netflix’s business model, increasing free cash flows by 660% from approximately $1 billion in 2022 to almost $6.6 billion in 2023.
The decision to introduce ads to the platform from the outset was well received by investors, but the increasing margins may suggest that the process is going smoother than the market expected, and interest in the “cheaper” ad-supported subscription is high. What’s more, in the American market, the price of ad plans has not increased since 2022. This gives Netflix increasingly compelling reasons to raise that price soon and test the demand threshold. The company paid over $5 billion for WWE Raw and for the next 10 years (from 2025 onwards) will be broadcasting live from the much-adored wrestling event.
At the same time, Disney is expected to sign a contract with ESPN, but analysts predict that the service will be pricier than Netflix. The massive increase in subscriptions suggests that users love the unique content and series, which could mean that consumers will be willing to pay more for them.
Netflix probably wants to gather as many people on its platform as possible, to later raise prices (and net income). Thus, the nearly 5% lower earnings per share did not scare off investors (the EBIT margin was still over 3% above expectations). Free cash flows are growing and in Q4 were 25% higher than forecast, amounting to nearly $1.6 billion. Everyone knows that the game is about dominating the streaming market.
Unlike its competition, Netflix is doing great, cash flow and debt are not an issue. This provides ample room to increase market share; subscriptions may be favorably priced, while the competition cannot afford to go below a certain threshold for fear of business liquidity.
There are signs that monetization will go a step further, and Netflix will cyclically ask consumers for additional payments for extra services. It’s worth emphasizing that the advertising market backdrop is currently incomparably better than in 2022, when fears of a recession were very widespread.
A study by Blackedge, conducted among 50 large ad-buying companies, indicated that even half of them would be interested in signing a contract with Netflix.
The giant saved $3.5 billion on content in 2023, improving free cash flows and despite these lower investments, it managed to add millions of paying consumers to the platform. The ratio of added content to Netflix subscriptions turned out to be the lowest in over a decade in 2023 (partly due to the sudden rise in subscriptions). Having less content didn’t stop the company from growing. Shareholders personally felt how limiting content expenditure benefited the company, and presumably, there are still many cost-cutting ideas to pursue.
“Netflix announces that Q1 financial data will improve significantly, the margin is expected to exceed 25%, and earnings per share are expected to double, from 2 USD per share, to 4.5 USD,” explains M. Stajniak from XTB.
There is no company on the horizon that could potentially end Netflix’s dominance. Optimism grows and Netflix provides the market with solid fundamentals for its shares to be listed at a premium compared to the competition.
“If the competition doesn’t start catching up with the leader, we may see a situation where Netflix will not only buy movies and series from others but also start the process of buying smaller streaming platforms,” concludes Stajniak.
