Written by: Carly Rothbort
Netflix Anonymous: My name is Carly, and yes, I am a Netflix freeloader.
Recently, I have fallen victim to Netflix’s (NFLX) 2023 password sharing crackdown and as a consumer, I am not happy about it. However, I am no longer just a consumer but now a financial professional who looks at products with an investor’s perspective. So yes, I have been watching NFLX, both the stock and the final season of The Crown.
On Tuesday, January 23rd NFLX reported earnings for 4Q23, and the market liked what it saw. The company reported a 12% YOY growth and added over 13 million subscribers to bring their global subscriber count to over 260 million households, NFLX surpassed analyst growth expectation. There were three main drivers that contributed to these reported earnings: crackdown of password sharing, addition of their ad supported tier, price increases, and announcement of their exclusive partnership with TKO Group (TKO). These strategic shifts in the business were an absolute game changer for the company and we predict the companies expected continued growth makes this a company to continue watching. And own. Let’s break it down.
Password Sharing Crackdown - Monetization
I have been watching NFLX closely since May of 2023 when they announced their plans to crackdown on password sharing. Speaking with a friend of mine, I predicted NFLX had nothing to lose from this and only growth to gain. Why was that? They simply had no risk of churn. Yes, they could lose some subscribers, but they only had the freeloaders (like me) to gain and that was far more than the few disgruntled customers whose stubbornness outweighed their wallet. They took a bet, and they won over 13 million subscribers. NFLX has proven to be, as economic theory states, price inelastic.
Ad Supported Tier & Price Increases
While password crackdown was implemented, NFLX knew that they had to be strategic in how they went about the change and that included offering more options to consumers. That included a cheaper tier that supported ads starting at $6.99 in addition to their Standard and Premium plans. A win-win for both the consumer and NFLX. The consumer was able to have a more cost-effective subscription option while NFLX was generating revenue from subscribers and ads. In addition, they also gave premium and standard plans the option of adding an extra member slot to the household for $7.99. As they do almost every year, they increased prices for their standard and premium plans adding to their growth in revenue.
Live Programming
NFLX recently announced a 10-year partnership with TKO, a global leader in the sports entertainment industry and parent company of WWE, to live stream WWE including Monday Night Raw and various other programming beginning in 2025. This will be a sizeable investment for Netflix but has the potential to bring in a large, loyal audience and keep them tuning in weekly. Check out Netflix’s press release to read more about the history of partners.
NFLX has been testing the live streaming waters since 2022 with shows like Love is Blind and Chris Rock’s stand-up comedy special, Selective Outrage. There was a huge blip with the Love is Blind live reunion special making it a flop, but NFLX quickly came back from that to make Chris Rock’s special a global success. We hope, and NFLX believes, it is ready for this huge live undertaking. They are lagging competitors in this area so if the next five-years prove to be a success, the company is in for some big growth.
Industry Effect
Last week, Disney+ (DIS), Hulu, and ESPN+ announced their own password sharing crackdown, following suit. Additionally, Amazon-Prime Video took NFLX’s lead and launched its own ad-free tier for an additional $2.99 per month. In my opinion, Amazon (AMZN) is lagging in original content behind NFLX and DIS. However, AMZN has many other positive attributes and products that make the stock attractive to us. With that said, the proof is in the pudding, NFLX is and will remain the industry leader in streaming and has a huge influence on the how the industry operates.
What Do the Financial Metrics Say?
Consumer behavior is important when evaluating a stock, but what it really comes down to are the numbers. Research at LakeView Asset Management (LVAM) shows that NFLX has a great amount of strength and growth yet to give. For starters, EPS (earnings per share) according to our calculations at LakeView are expected to rise about 76% from 2023 to 2025. Put another way, we expect the company to enjoy a 2-year annualized earnings growth rate of 33% with a current PEG ratio (price/earnings-to-growth ratio) of 0.98. But what does this number tell us? A PEG ratio below 1.5 is what we consider a strong buy. A PEG ratio above 2 LVAM considers overpriced. In the case of NFLX, with a PEG ratio below 1.0 (which is a rarity) we are looking at a stock which can be aggressively added to one’s portfolio, as we have done. Lastly, NFLX’s balance sheet strength is strong. With a total debt of $14.5 billion, net debt of $7.4 billion, and a market cap of $245 billion, it is safe to say the company’s balance sheet shows its strength in numbers with its net debt just a nominal fraction of its market cap. All told, we expect NFLX to continue to add global subscribership which will equate to strong earnings growth and stock price acceleration.
As a consumer, the price increases and password crackdown stinks, but as a company, NFLX has won the streaming wars, and I am all here for it. From their strategic growth and ability to scale, Netflix will continue to be a powerhouse that will slowly pick competitors off one by one. Their proven ability to turn the company around with strategic business opportunities shows they can remain strong. Expect the company to continuously evolve and change over time to stay in tune with ever-changing consumer behavior. Content and engagement will continue to be the forefront of the business.
Now, like many in my generation, I will most likely lose my personal battle soon and cave into paying for my own subscription but hey, that’s exactly why they are winning. What the consumer wants, the consumer pays for. But what the consumer pays for, the consumer expects, and I predict NFLX can meet those expectations given their financials and forward thinking.
Finally, a word from Scott. He recommends you watch the entire Heist series on NFLX as it is “binge-worthy”.
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