Investors reacted positively to the data published by the streaming service Netflix in the last quarter of 2022. Immediately after its release (January 20, 2023), the shares of this company rose by 4.7%, reaching $358. The next day, they added another 8.5%, provoking an increase in the entire United States stock market. Following the quotes of this company, the securities of its rivals (Warner Bros. and Disney) began to rise in price. Since mid-February, Netflix shares have been falling in price and as of February 23, their price was in the region of $317.
In the last three months of last year, the number of people subscribed to the American streaming service, as well as the company’s operating profit and the volume of its materials, turned out to be higher than managers predicted. Thus, the size of the paid audience increased by 7.66 million, significantly ahead of forecasts that spoke of 4.57 million.
Netflix’s Q4 2022 revenue increased 1.9% year-on-year to $7.85 billion. At the same time, the company’s net profit decreased by almost 11 times, amounting to $55 million against last year’s $607 million. The reason for this fall was losses on Eurobonds. The operating profit of the service also decreased (from $632 million to $550 million). The profit diluted per security, received by the firm over the three-month period, reached $0.12 (in 2021 it was equal to $1.33).
Over the past year, Netflix’s paid audience reached 231 million. The volume of funds received by it for the year increased by 6.5%, reaching $31.6 billion. At the same time, its operating income and FCF were $5.67 billion and $1.6 billion, respectively.
Netflix forecast for 2023
The company expects its free cash flow to be at least $3 billion this year (assuming there are no large fluctuations in the exchange rates of world currency units against the US dollar in the Forex market).
During the first three months of 2023, Netflix plans to increase revenue by 3.9% to $8.17 billion, and also achieve net income of $1.28 billion. The firm also forecasts quarterly earnings per share of $2.82 and an operating margin of 19.9%.
In addition, Netflix previously announced personnel changes among its top executives. Reed Hastings (one of the founders of the company) will step down as its CEO.
About 45% of the company’s funds come from the United States. The European, Latin American and Asian regions account for 31%, 13% and 11% of revenue, respectively. In the absence of currency revaluation, the increase in sales would have been 1.9% instead of 10%. At the same time, analysts note that in the last quarter of 2022, the US dollar began to decline against major currency units. In this regard, it is highly likely that in 2023 the revaluation of currencies will stop putting pressure on Netflix, whose FCF has remained positive for 4 consecutive quarters.
What factors will affect Netflix stock in the future
After the company published its quarterly report, many experts increased the target price of its securities over the next 12 months (from $350 to $375-440). At the same time, some experts believe that the company’s shares are valued undeservedly high, although they acknowledge that they still have growth drivers.
The latest quarterly reporting was positive (primarily in terms of the influx of subscribers), but analysts admit that the results of January-March 2023 may upset market players. So, during this period, the company will release only 60 new films and series, while in the last reporting period this figure was 154.
Certain concerns are also provoked by the relatively strong rating of Netflix. On an EV/EBITDA basis, the stock trades at around 21.5x, which is 40% better than Disney’s and more than double that of Paramount and Warner Bros. At the same time, the firm’s fundamentals are at about the same level as Disney’s.
There are three factors that could have a positive impact on Netflix stock in the long run. This is the introduction of advertising, the introduction of restrictions on the use of one account by several persons and the growth of the field of computer games. At the same time, the firm does not have growth drivers in the short run. Because of this, some experts believe that the fair price of Netflix shares is now $273.
Top Risks for Netflix Stock
There are a number of factors that can hinder the further development of the company. First of all, the risks are associated with the implementation of the company’s strategic development plan. In particular, from the end of autumn 2022, streaming service customers can purchase a less expensive version of the subscription with ads, and polls say that about 50% of the audience is interested in this option.
With this innovation, Netflix gets another source of income (it expects to earn $ 830 million from advertising this year). But to argue that such innovations can greatly affect the company’s business model is now premature. The likelihood that advertising revenue will be more than 10% of total revenue over the next few years is very low.
If the global decline in activity in the economy continues, advertising budgets will continue to decline. In addition, a cheaper plan could hurt Netflix’s average revenue per customer.
Some experts believe that the securities of the streaming service have already lost their attractiveness, as they can continue to grow only if the broad market grows. At the same time, it is unlikely that in the absence of extremely positive sudden incidents, the growth rate of Netflix quotes will exceed the dynamics of the indices.
The US and Canadian markets (native to Netflix) are already highly saturated and are growing at a slower pace than the global market. Earlier it became known that Microsoft is considering the option of acquiring the streaming service in 2023, but it is still difficult to say exactly how this will affect its shares.
The future of streaming
Experts note that over the past few years, this market segment has undergone significant changes. In particular, Netflix has a number of very serious rivals in the form of Apple, Amazon and Disney. Over time, this situation may result in a drop in the price of subscriptions and, as a result, the margins of firms.
Netflix’s stock valuation has fallen to 4.5x P/S, the lowest since 2015, but Disney’s is 2x lower (2x P/S). This increases the attractiveness of the papers of the Mouse House, which, in addition to streaming, earns from amusement parks and cable networks.
According to some analysts, streaming services look good enough in the context of the still strong position of the US consumer along with falling inflation. They call Warner Bros. the most interesting option among Netflix rivals, since this firm has not only industry-specific drivers, but also the synergy of Discovery with Warner Media, which merged in the spring of 2022.