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Netflix's (NASDAQ:NFLX) Q4 Sales Top Estimates


Full Report / January 23, 2024

Streaming video giant Netflix (NASDAQ: NFLX) reported results ahead of analysts' expectations in Q4 FY2023, with revenue up 12.5% year on year to $8.83 billion. It made a GAAP profit of $2.11 per share, improving from its profit of $0.53 per share in the same quarter last year.

Netflix (NFLX) Q4 FY2023 Highlights:

  • Market Capitalization: $212.6 billion
  • Revenue: $8.83 billion vs analyst estimates of $8.71 billion (1.4% beat)
  • EPS: $2.11 vs analyst expectations of $2.22 (4.8% miss)
  • Q1'24 EPS guidance: $4.49 per share (above expectations of $4.14)
  • Free Cash Flow of $1.58 billion, down 16.3% from the previous quarter
  • Gross Margin (GAAP): 39.9%, up from 31.2% in the same quarter last year
  • Global Streaming Paid Memberships: 260.3 million, up 13.1 million quarter on quarter (beat vs. expectations of 8.8 million net adds; every geography beat)

Launched by Reed Hastings as a DVD mail rental company until its famous pivot to streaming in 2007, Netflix (NASDAQ: NFLX) is a pioneering streaming content platform.

Netflix has a large and ever growing library of TV shows, movies, documentaries, and children’s programming. The company is known for its innovative approach to content delivery. For its first 10 years, that meant DVD rentals by mail with no return date. It launched streaming in 2007, which used customer data to surface programming that users might be interested in.

In 2013, the company began producing its own programming, weaning itself off of relying entirely on other company’s content. Hit shows such as "Stranger Things" and "The Crown" drew in audiences and kept them loyal to the platform. Today, Netflix generates revenue through its subscription-based model as well as an ad-supported one, with different plans at various price points.

For consumers, Netflix upended the traditional model of consuming content, flipping the paradigm from “appointment viewing” to a more customer centric “on demand viewing” Netflix’s granular viewing data also fundamentally altered what type of content was produced, stratifying what was once a handful of genres into dozens of niches that are able to find audiences in a sea of viewers. These innovations have been mimicked by many streaming services, and have become a quasi-standard of content consumption today.

Consumer Subscription

Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to, what movie they watch, or even finding a date, online consumer businesses are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have further increased usage and stickiness of many online consumer services.

Netflix (NASDAQ:NFLX) competes with a range of streaming content rivals, from Amazon (NASDAQ: AMZN) and Disney (NYSE:DIS) to Paramount (NASDAQ:PARA) and Warner Bros Discovery (NASDAQ:WBD).

Sales Growth

Netflix's revenue growth over the last three years has been unremarkable, averaging 10.7% annually. This quarter, Netflix beat analysts' estimates but reported mediocre 12.5% year-on-year revenue growth.

Netflix Total Revenue

Usage Growth

As a subscription-based app, Netflix generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.

Over the last two years, Netflix's users, a key performance metric for the company, grew 7.2% annually to 260.3 million. This is average growth for a consumer internet company.

Netflix Global Streaming Paid Memberships

In Q4, Netflix added 29.53 million users, translating into 12.8% year-on-year growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Netflix because it measures how much the average user spends. ARPU is also a key indicator of how valuable its users are (and can be over time). Netflix ARPU

Netflix's ARPU has declined over the last two years, averaging 0.5%. Although the company's users have continued to grow, it's lost its pricing power and will have to make improvements soon. This quarter, ARPU declined 0.3% year on year to $33.94 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Netflix's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 39.9% this quarter, up 8.7 percentage points year on year.

For internet subscription businesses like Netflix, these aforementioned costs typically include customer service, data center and infrastructure expenses, and royalties and other content-related costs if the company's offering includes features such as video or music services. After paying for these expenses, Netflix had $0.40 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.

Netflix Gross Margin (GAAP)

Netflix's gross margins have been trending up over the last 12 months, averaging 41.6%. This is a welcome development, as Netflix's margins are below the industry average, and rising margins could suggest improved demand and pricing power.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Netflix grow from a combination of product virality, paid advertisement, and incentives.

Netflix is extremely efficient at acquiring new users, spending only 19% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a highly differentiated product offering and customer acquisition advantages from scale, giving Netflix the freedom to invest its resources into new growth initiatives while maintaining optionality.

Key Takeaways from Netflix's Q4 Results

It was great to see Netflix's strong user growth this quarter. The 13.1 million net adds from last quarter were well above expectations of 8.8 million. ARPU also outperformed slightly in every geography except Asia-Pacific. These dynamics led to a revenue beat. Looking ahead, the company called for 16% revenue growth year on year when excluding the impacts of foreign exchange, which was robust. The company also upped its full year operating margin guidance and gave EPS guidance above expectations. Finally, the company struck a bullish tone when speaking about bigger picture competition, saying that industry consolidating is expected but that its opportunity remains vast. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is up 4.4% after reporting and currently trades at $512.7 per share.

Is Now The Time?

When considering an investment in Netflix, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

Although we have other favorites, we understand the arguments that Netflix isn't a bad business. Although its revenue growth has been mediocre over the last three years, its growth over the next 12 months is expected to accelerate. And while its ARPU has been stagnating, its user acquisition efficiency is best in class.

At the moment Netflix trades at 23.2x next 12 months EV-to-EBITDA. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Netflix doesn't trade at a completely unreasonable price point.

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Key Takeaways from Netflix's Q3 Results

Sporting a market capitalization of $158 billion, more than $7.87 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Netflix is attractively positioned to invest in growth.

While the company’s revenue was roughly in line with expectations, streaming net adds (essentially the company’s paying customers) beat across all geographies. This would normally be a positive, but this quarter, there is probably some added enthusiasm around it since Netflix rolled out paid sharing, which came with some skittishness among investors about whether some subscribers would leave. EPS beat by a more convincing fashion. Looking forward, Q4 revenue guidance was below expectations but the company bullishly raised its full year outlook for both operating margin and free cash flow. Lastly, Netflix bought back $2.5 billion in shares this quarter, well above the $1+ billion in buybacks for the first six months. With a fresh new buyback authorization and a higher free cash flow outlook, repurchase activity could remain strong, which many investors will cheer. Overall, the results weren't perfect but were quite strong, especially amid fears about what the paid sharing development could do to churn. The stock is up 11.6% after reporting and currently trades at $386.31 per share.