Netflix Flies in the Face of Bears
Netflix’s recent financial ascent has left naysayers gobsmacked. The company’s stock skyrocketed by 11% on Jan. 24 following the revelation of its fourth-quarter earnings, which unveiled a remarkable 12.5% year-over-year revenue surge to $8.83 billion. Simultaneously, its net income experienced a staggering 1,605% leap to $938 million, or $2.11 per share, despite falling slightly short of the predicted target by $0.11 due to unrealized losses stemming from currency headwinds related to its euro-denominated debt.
The market’s collective jaw hit the floor at these numbers. Contrary to doubters’ assumptions, Netflix’s high-growth era remains alive and kicking, even though its stock presently lags more than 20% behind its peak and sits as the least valuable FAANG company, boasting an enterprise value (EV) of $249 billion.
Image source: Getty Images.
Netflix Stages a Strong Comeback
The skeptics had gauged Netflix’s growth to peter out as rivals like Disney, Warner Bros. Discovery, Paramount Global, and Amazon swooped in on the streaming market. This forecast seemed plausible as Netflix’s revenue growth waned throughout all eight quarters of 2021 and 2022. Apart from this, the initiation of an ad-supported tier and password-sharing plans implied a struggle to attract new subscribers and generate revenue.
But, unexpectedly, in 2023, revenue growth not only steadied but accelerated in the last two quarters. Furthermore, it began augmenting its paid subscribers by double digits after a sluggish nine-quarter run of single-digit progress.
|
Metric |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Paid subscribers (millions) |
230.75 |
232.50 |
238.39 |
247.15 |
260.28 |
|
Growth (YOY) |
4% |
4.9% |
8% |
10.8% |
12.8% |
|
Revenue |
$7.85B |
$8.16B |
$8.19B |
$8.54B |
$8.83B |
|
Growth (YOY) |
1.9% |
3.7% |
2.7% |
7.8% |
12.5% |
Data source: Netflix. YOY = year over year.
Netflix ascribed this swift growth to a combination of its new paid sharing plans, augmented subscription fees, favorable currency movements, and a “stronger than anticipated” surge in membership. The company foresees this momentum persisting, projecting a 13.2% year-over-year revenue upswing in the first quarter of 2024.
Netflix’s ability to hike its prices in a cutthroat environment dispels pessimistic forecasts of fee reduction being pivotal for growth. Simultaneously, it is phasing out its most economical ad-free Basic plan to steer more subscribers toward its ad-supported tiers, hinting at its confidence in expanding its advertising ecosystem while keeping its current subscribers engaged.
Consequently, Netflix’s operating margin more than doubled year over year to 16.9% in the fourth quarter, jumping from 18% in 2022 to 22% in 2023 for the full year. It anticipates sequential and year-over-year operational margin expansion to 26.2% in the first quarter of 2024, bolstering the contention that Netflix stands as the sole streaming frontrunner capable of maintaining robust gains in subscribers while consistently turning a profit.
Netflix vs. Meta: The Big Showdown
Analysts are forecasting a 14% uptick in Netflix’s revenue for 2024 followed by a 12% surge in 2025. However, it wouldn’t be shocking if these estimates were swiftly revised in response to the latest blowout numbers. As for earnings per share (EPS), a 39% rise is expected in 2024, trailed by a 24% growth in 2025. Yet, with a forward earnings multiple of 33x, a significant portion of this growth has already been factored into Netflix’s stock.
Contrastingly, Meta’s revenue is projected to climb by 13% in 2024 and 12% in 2025 as its primary advertising business undergoes recuperation in a friendlier macro environment, alongside the expansion of its Reels short-video platform. EPS is anticipated to grow by 21% in 2024 and 14% in 2025, even as the company ramps up spending on its unprofitable Reality Labs segment and enlarges its colossal data centers. When weighed against Netflix, Meta’s stock remains fairly valued at 22x next year’s earnings.
For Netflix to draw level with Meta’s existing EV by the closure of 2025, its stock would need to quadruple to nearly $2,200—more than 100x its projected earnings for 2025—in the next two years. Unlikely as it may seem, Netflix was grappling with a similar challenge in the early 2010s against Blockbuster, and we all know how that ended.
The Prospects of Netflix and Meta Platforms Unearthed
Netflix has enjoyed astronomical growth, with its stock price increasing over 100 times its trailing earnings in 2019. Yet, sustaining such a high valuation may prove challenging for the streaming giant. In contrast, Meta Platforms stands poised for even greater growth in the coming years, potentially outstripping Netflix’s market worth. While Netflix’s stock still has considerable upside, it is likely to remain the most undervalued FAANG stock in the near future.
Investing in Netflix: A Consideration
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Randi Zuckerberg, former director of market development and spokesperson for Facebook, and sibling to Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool’s board of directors. John Mackey, ex-CEO of Whole Foods Market, a subsidiary of Amazon, also sits on The Motley Fool’s board of directors. Leo Sun, who holds positions in Amazon, Meta Platforms, and Walt Disney, is a Motley Fool contributor. The Motley Fool owns and recommends stocks of Amazon, Meta Platforms, Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
