Netflix (NASDAQ: NFLX) reported a combined loss of 1.2 million subscribers during the first and second quarters of 2022, marking a rare setback for the streaming behemoth. This unexpected contraction triggered a 76% plummet in the company’s stock value shortly after reaching a record high.
The company’s response to this downturn entailed a vigorous crackdown on the estimated 100 million users who accessed Netflix without proper payment, leading to a remarkable rebound. As Netflix confronted these challenges head-on, its shares surged by over 200% from their 2022 low.
The Evolutionary Dance of Strategy
Netflix’s leadership articulated the widespread issue of 100 million households sharing passwords in its Q1 2022 shareholder letter, highlighting the substantial revenue potential hidden within these already-engaged customers. The company’s endeavors to convert these households to paying subscribers yielded promising results, fueling the business’s growth trajectory.
Additionally, Netflix’s unanticipated move to introduce an ad-based subscription tier, a strategy it had long resisted, garnered significant traction with a 70% sequential membership growth in Q4 2023. These strategic pivots notably contributed to Netflix’s record-breaking Q4, reflecting a net addition of 13.1 million new subscribers to the platform.
Investment Prospects
Building on its exceptional Q4 performance and resurgent stock value, Netflix has firmly reclaimed its leading position in the streaming landscape. While numerous competitors struggle with profitability, Netflix has steadily improved in this domain, expanding its operating margin by 280 basis points to 20.6% in 2023. The company foresees further margin growth to 24% in the coming year, underscoring the unmistakable advantages of scale within its operations.
Moreover, Netflix anticipates a healthy free cash flow of $6 billion in 2024, buttressing its financial stability and commitment to rewarding shareholders. Remarkably, the company repurchased $6.1 billion of its own stock last year, signaling a solid financial standing that has defied skeptics’ expectations.
Despite Netflix’s current price-to-earnings ratio of 47.1, the company’s robust revenue, profits, and free cash flow, all exhibiting double-digit growth with accelerating momentum, arguably justify its premium valuation. Therefore, while new investors may hesitate at its seemingly elevated multiple, a long-term mindset is essential to comprehend the broader investment rationale.