Netflix’s Q4 Earnings Show a Comeback in Subscriber Growth

Netflix’s NFLX fourth-quarter earnings showed the streaming-video company is excelling in a highly competitive landscape, but success is coming at a higher cost as customers have more choices.

Netflix shares jumped after reporting gains in subscriber growth in the fourth quarter that far exceeded its own projections. Trading at roughly $337 per share, Netflix stock is above its fair value estimate of $315 per share but carries a 3-star Morningstar Rating, meaning it’s still considered to be in fairly valued territory.

The company credited the addition of 7.7 million new subscribers to a lineup of content that included, among others, Harry & Meghan, the documentary of the Duke and Duchess of Sussex and their travails with the Royal Family.

Netflix had projected it would add 4.5 million net new subscribers in the quarter, ahead of the 2.4 million added in the third quarter. The results came close to the 8.3 million it signed up in the fourth quarter of 2021 when viewers were cooped up at home because of coronavirus outbreaks.

Morningstar senior equity analyst Neil Macker raised his fair value estimate on Netflix stock to $315 a share from $290 to account for expected continued gains in revenue from a new paid password sharing plan that the company expects to rollout this quarter. But he is concerned about the potential for customer churn amid competitive pressures.

“Our updated fair value estimate of $315 per share assumes that Netflix’s domestic paid streaming subscriber count expands only slightly to 76 million in 2027,” says Macker. “Price elasticity plays a major role in our estimates. In general, we are skeptical of the claim that pricing increases won’t harm customer counts globally.”

Strong Finish After a Bad Year for Netflix Stock

It was a strong finish to a roller-coaster year for Netflix that saw stiffer competitive pressures, subscriber losses, and tougher comparisons as people tired of COVID-cocooning and turned away from their television sets and embraced live musical and theatrical experiences. In the stock market, growth and technology stocks were clobbered last year as investors revalued their earnings prospects amid rapidly climbing interest rates. Netflix stock lost 51.1% in 2022, its third-worst annual decline, as the broader market fell 19.4%.

After a dismal first half when Netflix reported back-to-back losses of subscribers, the company made a stunning comeback in the second half. It ended the year with 230.7 million global paid subscribers, up from 223.6 million at the end of the third quarter and 221.9 million at year-end 2021. All four of its global regions showed gains in customer growth.

Still, the leader in video-streaming on-demand services fell short of earnings expectations. It posted quarterly net income of $55 million, or $0.12 a share compared with Wall Street expectations of $0.55 a share. The company blamed the shortfall partly on the revaluation of European debt because of the depreciation of the U.S. dollar versus the euro in the fourth quarter.

In the fourth quarter ended December 2022, Netflix posted revenue of $7.85 billion, slightly below the $7.86 billion expected but 2% ahead of the year-earlier period.

Netflix Key Q4 Earnings Takeaways

• Revenue: $7.85 billion versus the FactSet mean estimate of $7.86 billion.
• Earnings per share: $0.12 a share versus the FactSet mean estimate of $0.54.
• Guidance: Netflix forecasts 2023 first-quarter revenue of $8.2 billion, a 4% gain from the year-earlier period. It projects net income of $1.275 billion, or $2.82 a share in the current quarter.
• Subscriber growth: 7.7 million versus the 4.5 million expected.

While Macker notes that continued investment in content and marketing will weigh on margin expansion he forecasts “average revenue growth of 9% for Netflix, with the operating margin expanding to 25% in 2027 from 21% in 2021 after dipping to 18% in 2022.”

Netflix also announced a shakeup in its top ranks that highlighted the depth and breadth of its long-standing management team. Founder and co-chief executive Reed Hastings becomes executive chairman. Ted Sarandos will remain co-chief executive and hand off his role as chief content officer to Bela Bajaria, formerly head of global TV. Chief operating officer Greg Peters becomes co-chief executive alongside Sarandos.

Netflix Stock Stats

Sector: Communication Services

Industry: Entertainment

Fair Value Estimate: $315

Morningstar Rating: 3 Stars

Morningstar Economic Moat Rating: Narrow

Moat Trend: Stable