Netflix Inc. (NFLX, Financial), the global leader in the over-the-top content streaming market, came under pressure in 2022 as interest rates climbed higher and it recorded subscriber losses for the first time in history.
The company’s troubles led many investors to believe it would have difficulty growing in the post-pandemic era. On the contrary, Netflix and its stock have made a remarkable comeback this year, aided by better-than-expected subscriber growth, expectations for a less aggressive Federal Reserve and its pure market dominance.
After a disappointing 2022, Netflix's shares are up around 35% this year.
Some of the recent strategy changes announced by the company are now giving investors better visibility into future earnings, and the long-term outlook remains bright.
Netflix remains the content king
Producing high-quality content is key for a streaming company to attract and retain subscribers. Netflix, as the largest and the most profitable content-streaming business in the world, is building on its insights into consumer viewing habits to create original content that has the potential to keep viewers hooked. According to Nielsen’s latest weekly streaming ratings for the week ended May 7, Netflix’s "Queen Charlotte: A Bridgerton Story"topped the charts as the most-watched TV show with 1.88 billion streaming minutes. This marked the 12th straight week where a Netflix TV show topped the charts, helped by original shows such as "The Diplomat," "Beef," "The Night Agent," "Outer Banks" and "You."
As highlighted below, Netflix dominated the charts once again across categories.
| Content category | Number of Netflix titles among the top 10 titles |
| Overall | 7 |
| Original programs | 7 |
| Acquired | 6 |
| Movies | 7 |
Source: Neilsen
Amid competition from the likes of Amazon's (AMZN, Financial) Prime Video, Walt Disney's (DIS, Financial) Disney+, Apple's (AAPL, Financial) Apple TV+ and Paramount Global's (PARA, Financial) Paramount+, Netflix continues to dominate the streaming charts, aided by its deep and differentiated content library. Supported by its market-leading position, the company continues to pump billions of dollars into original content production. More importantly, it is using the vast amount of streaming data collected from the hundreds of millions of its users to create content that is highly unlikely to be rivaled by its peers.
A great example is how Netflix is aggressively investing in Korean content after the wide acceptance its top Korean TV shows received in the recent past. Co-CEO Ted Sarandos is planning a two-day visit to South Korea later this month to meet Prime Minister Han Duck-soo and other top officials ahead of the company’s planned $2.5 billion investment to produce original content in the Korean language.
New strategies are attracting Wall Street bulls
Around this time last year, Netflix was increasingly being viewed among analysts as a company that lacked the potential to deliver double-digit growth. The tables have turned today with the success the company is seeing with its recent strategic decisions, such as the rollout of an ad-supported tier and the introduction of paid account sharing.
Last May, Netflix held its first-ever upfront presentation for advertisers, a mechanism used by traditional media companies to secure large-scale advertising commitments. During the presentation, the company revealed that more than 25% of new subscribers in regions where ad-supported plans are available are signing up for them, indicating there is strong momentum. The company also revealed that 70% of those subscribers are in the prime advertising demographic, which are those between the ages of 18 and 49. Netflix unveiled several unique options for advertisers to make the most of this opportunity including the ability to sponsor popular TV shows at launch and brand placement in the top 10 programs at any given time. The company also struck a partnership with EDO to offer engagement metrics.
These recent developments have caught the attention of Wells Fargo (WFC, Financial) analyst Steven Cahall, who boosted his price target for Netflix to a Wall Street high of $500, implying 25% upside from the current market price.
The paid account sharing plan is also winning the approval of analysts and investors alike. For many years, Netflix has grappled with the challenge of many individuals logging into one account. In response, the company has been testing a paid sharing option in some of its non-core markets for a few quarters now. In late May, this option was launched in the U.S. as well. J.P. Morgan (JPM, Financial) analyst Dough Anmuth believes paid sharing revenue will eclipse $2.4 billion in 2024 and reach a staggering $3.5 billion in 2025 as the company aggressively introduces this tier in its core markets. The analyst boosted his price target for Netflix from $380 to $470 on June 7, citing the paid sharing windfall.
Takeaway
Netflix, despite its massive size, is not too big to grow. The company is ready for the next phase of its growth story with the help of advertising revenue and the expected success of its paid sharing tier. It is now at a stage where it can fund most of its content investments through free cash flow, which should keep its balance sheet healthy for the foreseeable future.
The company still has a long runway for growth internationally, so long-term-oriented investors who are not concerned about volatility in the short term might want to hold Netflix shares until the thesis fully plays out.
