- Best quarter for subscriber additions since Q1 2020
- Management raises margin guidance for 2024
- Shares rise despite lofty valuation
- Stock still trades more than 20% below 2021’s all-time high
“Netflix stopped giving guidance for net subscriber additions in 2022 when it suffered a brief drop in numbers and started focusing on profits and cash flow instead, so it is slightly ironic that the share price surge following its fourth-quarter numbers is the result of higher-than-expected new customer sign-ups and earnings that slightly undershot analysts’ forecasts,” says AJ Bell investment director Russ Mould. “The increase in subscribers does lay the foundations for future growth and management’s upgrade to profit margin forecasts for 2024 reflects that, especially as the firm experiments with its advertising model and plans price increases.
“Investors will welcome some good news on earnings, as housebuilder DR Horton, industrial conglomerate 3M and silicon chip maker Texas Instruments all produced disappointing fourth quarter earnings or coughed up a profit warning for the first quarter of 2024 (or both) overnight. None of those announcements sits that easily with the stock and bond markets’ preferred narrative of a soft landing for the US economy, if indeed there is a landing at all.
“Markets will therefore seek succour from Netflix, which is not one of the so-called Magnificent Seven (even if it was a founder member of the FAANG grouping) whose share prices are doing so much to propel the headline US indices to record highs. This is mainly because its market capitalisation of some $240 billion easily lags that of the smallest member of the Magnificent Seven, Tesla, which comes with a $665 billion price tag.
“Perhaps Netflix’s fourth-quarter numbers and guidance for 2024 will allow it to press its case for membership of this club, perhaps even at Tesla’s expense, especially if the latter’s share price keeps sliding in the face of rising competition from Chinese suppliers in particular and concerns over sliding prices for its cars. Tesla’s shares are down by more than a third from their peak of summer 2023 (and by half from 2021’s high), while Netflix’s shares are back in the ascendant, even if they are, too, still technically in a bear market, as they sit just more than a fifth below their 2021 zenith.
Source: LSEG Datastream data
“That may be the result of how Netflix’s shares remain very highly valued. Its $240 billion market cap compares to consensus analysts’ forecasts for a 2024 net profit, before the upgrade to margin guidance for the year of some $7 billion.
“Netflix therefore trades on some 34 times forward earnings when the S&P 500 trades on 22 times, according to research from S&P Global. That big premium may go at least some way to factoring in Netflix’s premium growth prospects.
Source: LSEG Datastream data, Zack’s, NASDAQ, Marketscreener, consensus analysts’ forecasts
“Investors do seem overly concerned by such niceties as the moment, not least because better-than-expected subscriber growth is driving earnings forecast upgrades. There could be trouble if we get a repeat of 2022, when net adds disappointed and dragged estimates lower, but management’s confidence seems to be rubbing off on the share price. Net customer additions of 13.1 million help too, especially as this is the best number since Q1 2020, when the pandemic and lockdowns had a major role to play and Netflix had less competition in the streaming market than it does now.
Source: Company accounts
“Retrenchment at some of that competition – where mergers and consolidation are now apparently under discussion – and the Hollywood strikes may have helped Netflix along the way.
“The latter brings Netflix’s deeper back catalogue of content, domestic and international, into play and it will be interesting to see how far Netflix feels it can push pricing and average revenue per user, as it experiments with advertising and customer offers that come with differing price points.
Source: Company accounts
“Management has thus far offered two pieces of guidance for 2024:
- Double-digit percentage revenue growth, on a constant currency basis. The consensus going into the fourth-quarter numbers was looking for sales in 2024 of $38.2 billion, a 14% advance compared to 2023’s $33.7 billion.
Source: Company accounts, Zack’s, NASDAQ, Marketscreener, consensus analysts’ forecasts
- An operating margin of 24%, compared to prior estimates of 22% to 23%.
Source: Company accounts, Zack’s, NASDAQ, Marketscreener, consensus analysts’ forecasts
“All other things being equal, that suggests an earnings per share figure for 2024 of some $16.70 or so, compared to the range of $14.61 to $17.81 (with a consensus north of $16) expected by analysts going into the fourth-quarter figures.”
Source: Company accounts, Zack’s, NASDAQ, Marketscreener, consensus analysts’ forecasts
