Market story: 🥤 Netflix gains almost 10% before the US open. Euphoria comes as subscribers number surge 📈

11:33 AM 24 January 2024

Netflix (NFLX.US) already has nearly 261 million streaming subscriptions and added 13 million new users, in the last quarter of 2023. In doing so, it beat Wall Street forecast of added subscriptions by almost 50%, and while it's clear that indirectly the number of paying customers has increased thanks to its password-sharing policy, it's clear by the numbers that subscribers are returning to Netflix. An exponentially growing user base means growing profits from their gradual monetization. Not surprisingly, the market turned a blind eye to weaker-than-forecast profits. Before the opening of the session on Wall Street, the company's shares had already gained nearly 10%, adding more than $20 billion, to $215 billion in current capitalization.

Netflix's Q4 2023 results have reassured all of Wall Street that the company has gained a number of competitive advantages, and it will be extremely difficult for contenders to knock it off its throne. All this at a time when Netflix's content spending is down more than 20% y/y. The stock is trading with pre-opening gains of more than 8%, and the panic that took place on the stock in 2022 has turned into euphoria. The company's phenomenon lies primarily in the platform and the actions of management, which has been able to scale Netflix's business vehicle, which has increased free cash flow by 660% from about $1 billion in 2022 to nearly $6.6 billion in 2023. Is the future bright? 

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Advertising - a business leverage

The decision to make advertising available on the platform appealed to investors from the start, but the increase in margins may mean that the process is going more smoothly than the market expected, and interest in a 'cheaper' subscription with ads is high. What's more, in the U.S. market, the $6.99 price of advertising plans has not increased since 2022.... And Netflix has an increasingly strong case to raise this price soon and test the 'demand threshold' with it. The company has paid more than $5 billion to WWE Raw and will make live broadcasts available for 10 years (starting in 2025). Disney is expected to sign a contract with ESPN at the same time, but analysts estimate the service will be more expensive against Netflix.

Powerful subscription growth suggests that users like the unique content and series, which could mean consumers will be willing to pay more for them. For now, we don't see subscription price increases; Netflix probably wants to get as many people on the platform as possible in order to conduct 'selection' later, raising prices (and net profits). So the almost 5% lower earnings per share didn't scare investors (the EBIT margin turned out to be more than 3% above forecasts anyway). Free cash flow is on the rise and in Q4 turned out to be 25% higher than forecasts. They amounted to almost $1.6 billion. So everyone knows that the game is on for dominating the streaming market.

Netflix stronger than competitors

Unlike the competition, Netflix is doing great, liquidity and debt are not an issue. This provides ample room for further market share gains; subscriptions can perform favorably on price, while competitors can't afford to go below a certain threshold, for fear of business liquidity. There are signs that monetization will go a step further. Netflix  may periodically asking consumers for additional payments, for additional services. It's also worth noting that the prosperity of the advertising market is now incomparably better than it was in 2022, when fears of a recession were rife. Today, they have given way to the expected 'soft landing' of the US economy.

A Blackedge survey of 50 large corporate ad buyers indicated that up to half of them would be interested in signing a contract with Netflix. The streaming giant 'saved' $3.5 billion on content in 2023, improving free cash flow, and managed to add millions of paying consumers to the platform despite these lower investments. Netflix's ratio of added content to subscriptions, turned out in 2023 to be the lowest in more than 10 years (indirectly due to a spike in subscriptions). Nevertheless, less content has not prevented the company from growing. Stockholders have felt firsthand how cutting back on content spending has turned out to benefit the company.... And there is probably still plenty of room to cut costs. There is no sign of a company on the horizon to end Netflix's dominance. Optimism is growing, and Netflix is giving the market a solid foundation for the stock to trade 'at a premium' to its competitors.

XTB Financial Markets Analyst Eryk Szmyd

Netflix chart (NFLX.US)

Netflix shares are still trading more than 40% below their 2021 highs. They have managed to bounce more than 200% from their summer 2022 lows.

Source: xStation5

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