Yesterday, Netflix published the results for Q4 2022, which turned out to be a bigger surprise than Wednesday's dance - the title character of the latest hit of the streaming platform. Earnings per share turned out to be almost four times lower than expected by the market, and yet the company's stock rose nearly7% in pre-market.
For one key reason…
Number of subscribers more important than net profit
Revenue came roughly in line with the market estimates of $7.85 billion, however net earnings per share (EPS) of 12 cents were a disappointment as analysts expected earnings of 45 cents. While Netflix missed earnings expectations, it added more subscribers than analysts were forecasting. It turned out that the number of new users increased in Q4 by 7.66 million against the expected 4.5 million. And somehow everyone forgot that the net profit was only USD 55 million compared to USD 607 million in the same period of 2021.
No need to worry, it's just an extraordinary loss
Such a strong divergence of the company's expectations regarding net profit was caused by the debt denominated in euro. The depreciation of the US dollar against the euro in the fourth quarter is not an operating loss. This is the result of currency risk. Despite this, the company's margins of 7% exceeded Wall Street expectations. And everyone is happy, especially investors, which was shonw by the pre-market upward move.
The increase in the number of new users was largely due to the Harry & Meghan series, which generated 1.69 billion watch minutes in the US in the period from December 12 to 18.
However, another show was the most popular in the fourth quarter of 2022.
A dance worth 3 million users
Netflix ended 2022 with a string of new hits, including the Tim Burton-directed series "Wednesday" starring Jenna Ortega and the next installment of Rian Johnson's "Knives Out" franchise - "Glass Onion". Since its debut on November 23, Wednesday has become the third most watched series on Netflix, behind Stranger Things and Squid Game, and has twice broken the record for the number of hours watched in a single week by an English-language series.
The famous dance of the title character Wednesday turned out to be an internet hit and immediately received numerous interpretations from stars and celebrities, and in its original form recorded 40 million views on YouTube. This, in turn, boosted series popularity and enabled the company to attract additional 3 million users.
A litmus test of streaming sentiment
Netflix has become a kind of litmus test for Hollywood and Wall Street when it comes to streaming. When the company kicked off the first half of 2022 with a series of dire earnings reports revealing a loss of 970,000 subscribers, investors began to panic. Netflix lost its billion-dollar market value, and aftershocks took a toll on other streaming-focused companies like Disney and Warner Bros. Discovery - The former suffered losses of $1.47 billion under previous CEO Bob Chapek.
Cheaper ad-supported subscription tier has potential
In addition to a series of layoffs of several hundred employees and budget cuts in 2022, Netflix introduced a cheaper ad-supported subscription tier in November for $6.99 a month, compared to $15.49 for its standard plan. This was the first quarter that Netflix's new ad-supported service is included in its financial results. The company did not disclose what proportion of new subscriptions choosed cheaper service. Company stated that the involvement of new users is comparable to the involvement of existing users. Streaming giant did not notice a significant number of people changing plans from more expensive to cheaper, which is a good prognosis for future results.
King is dead long live the king
The market also positively received information about the resignation of CEO Reed Hastings. Greg Peters, who was responsible for launching the advertising service, will take his place. This may mean that the advertising business is particularly important for Netflix, and the forecasts around its future are optimistic. Netflix wants to solve the problem of shared accounts, which is why at the beginning of 2023 the company decided to significantly reduce this practice.
Netflix forever alive
However, taking into account rising recession fears and uncertainty caused by generally weak earnings season, Netflix appears to be a beacon of hope for the market bulls and its ability to beat expectations in terms of attracting new subscribers is crucial. And it doesn't matter if it's due to the flood of new, interesting premieres, unexpected successes of dance scenes or simply the season and weather that encourage people to spend time in front of the TV.
