With markets returning to YTD highs driven by promises of lower inflation and lower interest rates, large-cap tech stocks are back in vogue. However, that doesn’t mean these tech giants with fantastic basics can’t and will not make major investments in 2024, especially when there are a number of catalysts under their belt to drive growth.
Netflix (NASDAQ:NFLX) is a high-level example here. The major streaming platform has seen its share price rise ~50% year-to-date, but in my opinion there’s still plenty of wind in Netflix’s sails to continue rallying.
Netflix enjoys several catalysts to continue strengthening its stock price valuation
A stack of positive drivers for Netflix makes now the right time to buy. First and foremost, of course, is the end of Hollywood blockbusters they’ve sidelined writers and actors, delayed hundreds of long-awaited projects, and drained billions from the Los Angeles economy. Thankfully, the strike ended before the lack of fresh content was able to do any significant damage to Netflix’s business — the company was still able to release most of its top Netflix originals this year, including new seasons of The Crown, Bridgerton and The Witcher. .
Here are a number of other key bullish drivers for Netflix:
- The company is enjoying the benefits of the price hike at a time when many competitors are raising prices. Netflix’s financials (which we’ll discuss in the next section) have shown that subscribers have virtually given up on any reaction to recent price increases. After all, when most competing streaming services are raising prices, the alternatives aren’t as attractive. And with the company seeing success in paid family sharing, the company has the opportunity to increase spending per family as well, versus its previous model of sharing unlimited passwords.
- An end to the contentious arms race? In its most recent earnings quarter, Disney (perhaps Netflix’s most serious competitor when you consider the market share of Disney+ and Hulu combined) announced that it would reduce content volume to focus on quantity. We we’re likely headed for a near-term future in which the major streaming giants stop trying to outspend each other on content and focus instead on core franchises.
- Record operating profits. Due to a combination of strong membership growth, more efficient headcount levels and more disciplined content spending, as described above, Netflix is generating record operating profits.
- Alternative engagement strategies. The company is building on its Netflix Bites pop-up cafe experiences to create more brick-and-mortar/offline destinations for Netflix fans, which it’s calling “Netflix House.” Over time, the company can build more of an experience business like Disney has.
The bottom line here: it’s a great time to binge on Netflix. Recent growth has picked up more steam in 2024, where Netflix has indicated it expects to benefit from a combination of growth in paid subscribers plus pricing tailwinds.
Netflix’s third-quarter results showed a strong pace in subscriber additions, which is the number one metric that moves its stock. The third quarter earnings summary is presented below:
Revenue rose 8% year over year to $8.54 billion, accelerating significantly above the third quarter’s 2% growth rate. Also note that Netflix’s Q4 guidance calls for further acceleration in revenue growth to 11% annually — a rarity in this economy where most companies, particularly in the tech sector, have commented on the slowdown in income growth driven by macro factors. Apparently, consumers are reining in their spending on goods – but despite the price hikes, subscribers are still hooked on their plans.
And new subscribers are also signing up in large numbers. 8.76 million net new subscribers joined Netflix in the third quarter, compared to 5.89 million last quarter and 2.41 million in the year-ago third quarter. These net additions were above the company’s expectations, and it expects a roughly similar number of net additions in the fourth quarter “give or take a few million.” Usually, a big subscriber add in one quarter signals pullback from the next quarter — so we’ll see if Netflix’s strength can hold in the fourth quarter.
By region, it’s worth noting that 1.75 million of these net additions came in the US and Canada, where average revenue per member (ARM) is the highest at $16.29. The next top-grossing market, Europe ($10.98 per member) contributed nearly half, or 3.95 million, of the quarter’s net additions. It is worth noting that this is despite price increases in the US, UK and France.
Note that membership in ad-supported plans grew 70% quarter-over-quarter (starting at $6.99 per month in the US). With many of the global price increases concentrated in the base tiers, which are also being phased out in many markets, more customers have flocked to ad-supported plans. While subscriptions remain the main revenue driver for Netflix, a higher ad-supported base will help increase Netflix’s awareness and credibility with advertisers, which will be a key source of future revenue as Netflix tries to compete with lower-cost broadcasters.
On the content side, a notable hit over the past few quarters has been the eight-season legal drama Suits (the final season, unfortunately, is not available on Netflix to stream due to copyright ownership special) that showed the value of the library’s contents. The renewed popularity of Suits has proven to Netflix and investors that splashy new content isn’t always the reason people sign up and pay to stream. 1 billion streaming hours in the third quarter were spent on Suits. Licensing popular content and bucking trends will be key for Netflix going forward.
In FY23, Netflix noted that almost all of its revenue growth came from membership growth; in FY24, it expects contribution from both revenue growth and price growth, including the end of free sharing.
Speaking of this dynamic in Third quarter earnings callCFO Spencer Neumann noted the following:
So just looking at ’24 specifically, as Ted talked about, we expect to have a great plan to take the business forward. And we expect to continue to do things like add additional members, grow our advertising revenue, as Greg discussed. And in addition, make some price adjustments. You saw this in our letter. All of these things will trigger ARM.
So ’23 was a pretty unusual year where basically all of our growth came from membership growth. And going forward, more broadly, not just ’24 and beyond, we will grow our business by continuing to improve our service, increasing engagement, increasingly satisfying current and future members. And now that, as Greg discussed, we have an account sharing solution, we have a clearer path to penetrate deeper into that huge addressable market of 0.5 billion TV-connected households and growing.
And with our continued plan evolution, pricing sophistication, and all that hard work growing our ad business, we’ll continue to get better at monetizing that large and growing reach and engagement. So we believe we have a long runway for growth both in terms of more membership and higher ARM over time in a more balanced way than what you saw this year, which was, again , quite an early year.”
Finally, a word about profitability. Netflix’s operating income of $1.92 billion in the third quarter rose 25% year-over-year and achieved a margin of 22.4%, 20bps above the company’s expectations and 310bps year-over-year. Meanwhile, the chart below shows that full-year operating margins are expected to reach 20%, the highest in any year except 2021.
Now, we note that with the strikes over, Netflix expects to spend more on content in FY24 (not quite hitting operating margins, of course, as content amortizes over several years). It expects cash spending on content in FY24 to reach $17 billion, up from $13 billion in FY23. But with recent pricing headwinds, strong subscriber trends and increased ad contribution, we think there is some leverage for Netflix to continue to grow its margin profile and earnings next year. We also note that the company has just started an FX hedging program, which should reduce its FX exposure (60% of its revenue is not US-denominated) in FY24 if rates are as volatile as were in FY23.
With successful price increases under its belt, strong subscriber engagement and a return to producing fresh content, there’s a lot to like about Netflix heading into 2024. It’s also worth remembering that the company is still a single-digit share of overall viewership of the broadcast. showing more room for market share growth.
Stay long here and ride the last momentum up.