Netflix stock skyrockets on earnings and guidance

Netflix's fourth-quarter financials impressed, and its outlook is encouraging.

Jan 24, 2024 - 08:30

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Netflix stock skyrockets on earnings and guidance

It may seem like global streaming giant Netflix doesn’t have much more room left to grow. However, that’s simply not the case. While many have Netflix accounts already, there are still hundreds of millions of people who haven’t subscribed to its service.

In a bid to change that, Netflix is doubling down on live sports programming with a transformational 10-year pact with KTO to ‘smackdown’ competitors. The deal gives it the rights to WWE’s Raw in the U.S., plus a bevvy of WWE content it can use to win over users globally.

It also sees an opportunity for growth still in its advertising tier, which is still maturing, and from licensing content from other streaming services that are cutting back exclusivity to ramp up their own revenue and profit.

Netflix Co-Founder & Executive Chairman Reed Hastings.
Ernesto S. Ruscio/Getty Images / Netflix

Netflix still has levers to pull for growth

The company’s crackdown on password sharing may not be a fan favorite, but ensuring families don’t violate its rules provides a new group of people to target for subscriptions.

Not everyone will sign up for Netflix’s (NFLX) - Get Free Report typical subscription service, and that’s OK. It’s ad-supported service, which commands a lower price tag, gives it another marketing option, and people are responding to it favorably.

“Our top ads priority -- you've heard us say before, I think you'll hear us say it again -- is scale," said co-CEO Greg Peters. “The company saw 70% quarter-over-quarter growth, versus 70% the quarter before and 100% the quarter before that.”

The ads plan accounted for 40% of all Netflix sign-ups in markets where it was offered last quarter. That showing was so strong that Netflix aims to retire its Basic plan in some countries as soon as this year.

Overall, Netflix subscribers grew more than anticipated in the fourth quarter. The company added 13.2 million paid members worldwide in the quarter, up 12.8% year over year. That left it exiting the quarter with a global membership of over 260 million.

The company thinks that live sports, including its new WWE partnership, can juice that figure even more over time.

Netflix over-delivers on fourth-quarter earnings

Netflix's fourth-quarter sales totaled $8.83 billion, up 12.5% from one year ago and marking the fastest growth since 2021.

The company’s top-line performance was driven by adding more subscribers than anticipated, and that was good news for its bottom-line performance too. Earnings clocked in at $2.11 per share. That was shy of Wall Street’s $2.22 estimates, but investors didn’t seem to care. Instead, they seem more encouraged by Netflix’s potential to accelerate sales in the future.

Netflix stock jumped by 8% after the company’s Q&A conference call. In the call, management was upbeat about its prospects to increase earnings.

The company’s first-quarter guidance calls for a profit of $4.49 per share, which was nicely higher than the $4.14 that analysts were forecasting.

Netflix has a new deal to stream WWE Raw.
WWE

Can live sports move the needle for Netflix?

Bringing WWE content to Netflix won’t come cheap. The company’s deal with TKO is valued at $5 billion. There’s also a hitch. The deal doesn’t begin until 2025, so hardcore fans hoping to view WWE Raw on Netflix must be patient.

The ability to provide WWE content on Netflix offers an intriguing opportunity. Live sports is an excellent way to convince those who may otherwise have passed on a Netflix membership to sign up.

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“WWE Raw is sports entertainment, which is right in the sweet spot of our fourth business, which is the drama of sport," said Sarandos. "Think of this as 52 weeks; a lot of live programming every week every year. It feeds our desire to expand our live event programming; most importantly, fans love it."

And, while the deal isn’t necessarily inexpensive, it’s not out of the ballpark.

‘You should look at this [the WWE deal] as it fits inside our $17B programming spend now," said Sarandos.

What’s next for Netflix?

The company has millions of untapped customers, so it still expects to see a lift in subscriber numbers next quarter. However, seasonality suggests that additions won’t be as significant as last quarter.

"We see so much potential and so much opportunity ahead of us in our core business. We've got hundreds of millions of qualified households out there that still have yet to sign up for Netflix; I can't believe it, but they're there, and we've got to win them over," said Sarandos.

In Q1, Netflix's guidance is for revenue growth of 13%.

"Similar to prior years, we expect paid net additions to be down sequentially (reflecting typical seasonality as well as some likely pull forward from our strong Q4’23 performance) but to be up versus Q1’23 paid net adds of 1.8 million,” said management in its press release.

The company also expects to be increasingly profitable despite spending on content. The forecast calls for the operating margin to expand to 24%, up from the prior outlook of 22% to 23%.

Given the prospect of more users and better margins, it’s easy to understand why shareholders are happy.

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