Netflix (NASDAQ: NFLX) has seen its fair share of trials and tribulations over the past couple of years. The streaming giant, once the unrivaled leader in its industry, hit a major bump in the road with the loss of 1.2 million subscribers in the first and second quarters of 2022. This jarring setback caused a steep 76% plunge in its stock value, mere months after reaching an all-time high.
Responding to this crisis, Netflix turned its focus to the estimated 100 million users who were accessing the platform without paying, cracking down on password sharing to recapture lost revenue.
As a result of this strategic shift, Netflix has staged an impressive recovery, with its shares bouncing back over 200% from their 2022 low. Yet, the burning question remains: Is the streaming stock still a worthwhile investment in the current bull market?
Strategic Maneuvers
Netflix’s management first highlighted the prevalence of 100 million password-sharing households in its Q1 2022 letter to shareholders. This vast pool represented a significant revenue opportunity, as these households were already active users of the platform, presenting the potential for conversion into paying customers.
While the exact number of conversions remains undisclosed, co-CEO Greg Peters expressed enthusiasm on the latest earnings call, underlining the company’s successful operationalization of the paid-sharing product as an integral part of its business operations.
Another unexpected move was Netflix’s introduction of an ad-based subscription tier, a departure from its long-standing resistance to such a model. The rationale behind this decision was to provide greater options to price-sensitive viewers, especially in the face of Netflix’s ongoing subscription fee hikes. Notably, this new tier saw a 70% sequential growth in membership during Q4 2023.
These strategic pivots have borne fruit, with Netflix achieving its best Q4 performance to date, adding 13.1 million net new subscribers to its platform.
Furthermore, Netflix recently struck a groundbreaking partnership with TKO Group Holdings to stream WWE content from 2025 onward. While this 10-year deal comes at an estimated cost of $5 billion for the streaming giant, it promises to enhance the appeal of Netflix’s service through exclusive live content.
These developments showcase Netflix’s unwavering adaptability and dynamic evolution, qualities that both investors and shareholders demand and appreciate.
Investment Analysis
Bolstered by its exceptional Q4 results and resurgent stock price, Netflix has reclaimed its dominant position in the streaming arena.
The company has demonstrated its superiority over competitors, many of whom are still grappling with profitability challenges. Meanwhile, Netflix has made significant strides in improving its operating margin, which expanded by 280 basis points to 20.6% in 2023. Executives are confident that this margin will further rise to 24% this year, highlighting Netflix’s burgeoning scale advantages.
Moreover, Netflix is forecasting a positive free cash flow (FCF) of $6 billion in 2024. The company repurchased $6.1 billion in stock last year, signaling its intent to continue with more buybacks in the future. This robust financial standing represents a remarkable transformation, defying the skepticism of many Netflix critics.
However, before rushing to invest in the stock, it is imperative to consider its valuation. Currently trading at a price-to-earnings ratio of 47.1, and a forward multiple of 33.2, Netflix may appear overvalued at first glance. Yet, with its double-digit revenue, profit, and FCF growth rates — all accelerating — the premium associated with Netflix’s stock arguably finds justification, provided one adopts a long-term perspective.
Ultimately, Netflix’s resurgence from adversity, combined with its relentless pursuit of innovation and growth, paints a compelling picture for prospective investors. However, the decision to invest should be underpinned by a balanced evaluation of the stock’s valuation and growth prospects.
As you contemplate potential investment decisions, it’s crucial to consider various perspectives and assessments. While the Motley Fool Stock Advisor team might not have included Netflix among their top picks, informed insights and prudent evaluations should guide your investment choices. Exercise due diligence and maintain a steadfast focus on long-term prospects rather than short-term fluctuations.
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