Netflix (NFLX, Financial) is the market-leading streaming provider with over 230 million paid subscribers. The company ruled the streaming world in the decade pre-2021 and benefited massively from the lockdowns of 2020. However, since the fourth quarter of 2021, the company has faced a series of challenges as its subscriber growth corrected downwards.
Billionaire investor Bill Ackman (Trades, Portfolio) even loaded up on over 3 million shares of the stock in January 2022 before dumping it just a couple of months later at a loss after Netflix reported a surpising loss of 200,000 subscribers. Following the sale of the stock, Ackman stated that “Netflix could bounce back” as its management is exceptional, though it seems he wasn't willing to take that risk himself.
Now it seems as though Ackman’s words have played out as management executed a series of new initiatives to turn the business around. This included launching an ad-supported plan, raising prices and getting rid of the account sharing feature (or at least, charging additonal fees when accounts are shared between multiple people).
Now it seems like these initiatives are paying off. In the fourth quarter of 2022, Netflix reported an increase in subscribers again and its revenue is starting to show signs of growth.
Its share price has increased by over 70% since May 2022 as the stock has rebounded somewhat, despite challenges still ahead. Let's break down the fourth-quarter results to see if there are any reasons for this momenum to continue.
Mixed fourth quarter financials
Netflix reported mixed financial results for the fourth quarter of 2022. The company reported revenue of $7.85 billion, which increased by 1.9% year-over-year. This may not seem like a fast growth rate for a “growth company," but it's worth putting this number into perspective. On a constant currency basis, its revenue actually increased by a healthy 10% year-over-year, as Netflix derives a large portion of its revenue from international markets.
Its revenue growth has been driven by a 4% year-over-year increase in subscribers to 230.75 million. Again, this may not seem to be incredible, but in early 2022, Netflix lost over 1 million subscribers.
By region, Netflix reports its North American market had $3.6 billion in revenue, which accounts for approximately 50% of the total. This is the most mature market for Netflix and thus it made sense to see it as one of the slowest growing with just 910,000 paid subscribers added during the fourth quarter.
A positive for Netflix is its North American market is the most lucrative from a pricing perspective. The company generates $16.23 per membership on average, which is greater than any other region. In recent quarters, Netflix has also exercised its pricing power, as it has managed to raise prices without losing too many subscribers. This is extremely important in the high inflation environment and also when subscriber growth is harder to achieve.
Netflix reported greater subscriber growth in the EMEA region, which had 3.2 million in net subscriber additions. I suspect this was driven more by Africa and the Middle East, as Europe is heavily saturated with Netflix subscriptions, thus I expect a similar dynamic to the U.S.
Latin America offers a huge market opportunity for Netflix and contributed 18% of its total subscriber base at 41.7 million. This market increased its paid subscribers by 1.76 million year-over-year and I expect this to grow as Netflix rolls out its ad-supported option. Multiple surveys online show Latin America has a preference for ad-supported video services. Therefore, Netflix has the ability to unlock a huge opportunity moving forward. Its ad-supported tier was launched in November 2022 and is thus still in the very early stage of development.
Content updates
Netflix operates a content machine. It must continually produce content to keep its subscribers happy. The company is home to popular Netflix series such as the iconic Squid Game, which has racked up over 1.65 billion viewing hours, as well as Stranger Things, which has been watched by for over 1.35 billion hours, and Wednesday, which has been viewed for over 1.24 billion hours.
Recently, Netflix launched a documentary profiling the public lives of Prince Harry and his wife Meghan the former Suits series star. The two have movies to LA now to escape the British press, after a series of scandals. This program has been massively successful and Netflix announced it was its second most popular documentary ever.
Founder stepping own
The founder of Netflix Reed Hastings reported he is stepping down as the CEO of the company and transitioning to the Chairman role. In an emotional fourth-quarter earnings call, he reported this would be his last public call. In the past, we have seen other founders make healthy transitions in large technology companies. For example, Bill Gates (Trades, Portfolio) stepped down as Microsoft’s (MSFT, Financial) CEO in the year 2000 and Larry Page stepped down from Alphabet's (GOOG, Financial)(GOOGL, Financial) Google in 2015. However, a founder does have a special place in a company and is often seen as the key visionary and driver. Overall, I personally would have preferred to see Hastings step down if/when Netflix becomes more successful again. Although this was a positive quarter, the company still has a huge amount of challenges. Thus, I believe the founder leaving at this stage is a negative.
Profitability review
Netflix reported atrocious profitability numbers in the fourth quarter of 2022. The company generated earnings per share of $0.12, which was down substantially from the $1.33 reported in the fourth quarter of 2021. In addition, this was substantially lower than the $3.10 earnings per share reported in the third quarter of 2022. Netflix blamed a ~$462 million non-cash expense which was related to currency fluctuations of its $5 billion in Euro bond-based debt.
Moving forward, management believes its margins will rebound next quarter to a healthy 19.9% at $2.20 in earnings per share.
Valuation and guru investors
Valuing Netflix is fairly challenging as its future subscriber growth is uncertain, and it may not longer be a "high growth" stock moving forward. However, we do know the stock trades at a price-sales ratio of 4.61, which is 43% cheaper than its five-year average. In addition, the stock trades at an enterprise-value-to-Ebitda ratio of 25, which is 59% cheaper than its fiveyear average. Its price-earnings ratio is not exactly cheap at ~30, but this is still 68% cheaper that its historic average.
The stock has a GF Value equal to $632, which means the stock is “significantly undervalued” at the time of writing.
Guru investors in the stock include value investor Joel Greenblatt (Trades, Portfolio), who owns 42,639 shares and increased his position by 24% in the third quarter of 2022. During that quarter, shares traded at an average price of $222 per share. Caxton Associates (Trades, Portfolio) and Spiros Segalas also bought shares at in the fourth quarter of 2022, when shares averaged $240.
This data comes from the Gurus' 13F filings with the SEC. Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Final thoughts
Netflix is still the market leader in online video streaming and is the pioneer of the industry. The company has faced a tough past couple of years, but there are now signs the tide is turning. As its ad-supported model gets rolled out and adopted across more countries, I believe its revenue will grow. In addition, the fact the company is no longer allowing accounts to be shared by multiple people without charging extra should help capture extra profitability. I believe founder Reed Hastings stepping down is a negative, but as he is still chairman this is not catastrophic.
