When Netflix (NFLX -1.12%) reported its fourth-quarter 2021 results last year, the stock dropped 22% on investor disappointment with slowing user growth. Unfortunately, those poor results proved to be a harbinger of a terrible 2022 for the company, and the stock fell 51% during the year.
What a difference a year makes. When the company recently reported its fourth-quarter 2022 results on Jan. 19, 2023, it wildly exceeded investor expectations, and the stock rose 15% by the market close on Jan. 24. Has Netflix finally turned the corner and regained its mojo?
Let’s take a look.
Why some investors remain cautious
What grabbed the media’s attention and what prominent news outlets pushed as the reason investors bid the stock price up after recent earnings were Netflix’s 7.66 million paid subscribers additions, which did surprise analysts, who only expected the 4.57 million subscribers additions. However, while it is nice that memberships are growing again, there are things to worry about in the report.
Revenue and earnings growth continue to deteriorate — that’s not good. For instance, revenue only grew 1.9% year over year in the fourth quarter of 2022, while earnings fell from $1.33 in the fourth quarter of 2021 to $0.12 in the fourth quarter of 2022, representing a 91% year-over-year drop in profits. Yikes!
NFLX Revenue (Quarterly YoY Growth) data by YCharts.
Wall Street isn’t projecting things to improve rapidly in 2023, either. Currently, analysts model only 7.91% annual revenue growth for 2023. Even worse, analysts expect profits to drop 20.96% in the first quarter and 9% in the second quarter of 2023. However, before going full bear on Netflix, you should consider several things.
The tide is turning in its favor
One thing that held Netflix back in 2022 was unfavorable foreign exchange rates that cost the company nearly $1 billion in revenue and $748 million in operating profits during the year. However, this trend is reversing.
Many investors are just now beginning to factor in that the tide is turning in Netflix’s favor, with the dollar recently dropping at its fastest rate since 2009. The dollar index peaked in the middle of November 2022 and has since fallen like a rock. Moreover, with signs of the U.S. economy weakening and the Federal Reserve expected to slow its rate hikes, the trend favors a further weakening of the dollar.
Ultimately, a weaker dollar favors Netflix’s results improving in 2023.
Netflix is still the lead dog
Everyone should remember that Netflix is still the streaming platform all the rest are chasing and is one of the few, if not the only, companies to make a profit from streaming. Even Disneya company that might have a better content vault, is far from profitability in its streaming operations, having produced a $1.5 billion operating loss in its fourth quarter 2022 results — that is terrible. So you have to ask yourself how many companies can afford to keep pouring hard cash into money-losing operations to keep up with this lead dog? Probably not as many as people think in this terrible economy.
In a market environment where every company tightened its belt, many media companies laid off workers and canceled TV shows. Yet, Netflix spent $17 billion on content creation in 2022, outspending every company except Disney. As Netflix continues to push the pedal to the metal, producing more and better content than most of its competitors, it should grab market share during this downturn.
The company is not just sitting idle
Netflix has pushed forward with two aggressive initiatives during this period to reinvigorate the company’s results.
First, it is rolling out its paid password-sharing feature in the U.S. near the end of the first quarter of 2023. It plans to charge primary account holders an extra fee for everyone who views the service outside the primary account household. The intention is to nudge “casual sharers” into creating their own accounts or at least receive some revenue from password sharing.
Second, the company is about two months into its push into advertising. Should the company’s strategy of creating lower subscription prices by creating cheaper, ad-supported tiers succeed, it could gain additional subscribers that refused to pay the price for its highest subscription plan. Additionally, advertising could serve as another revenue stream.
Management hopes it can at least become as large as Hulu in advertising over the next several years. And during its recent earnings call, Netflix Chief Financial Officer Spencer Neumann revealed the company went into advertising with the intention that the business could achieve at least 10% of its revenue.
While Netflix may have had a terrible year in 2022, investors are looking at this company with renewed interest in 2023. It remains the top company in streaming media. Moreover, with the company’s two new revenue initiatives due to start boosting revenue and profits in the second half of 2023, in time for an economic rebound that economists expect in 2024, you should put this stock on your radar screen.
Rob Starks Jr has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
