All eyes were on Netflix, Inc. (NASDAQ:NFLX) Thursday afternoon, as it was the first of the (now defanged) FAANG stocks – Meta Platforms, Inc. (NASDAQ:META), Amazon.com (AMZN), Apple Inc. (NASDAQ:AAPL), Netflix and Alphabet Inc. (NASDAQ:GOOG) – to report its fourth-quarter earnings.
But before we dive into Netflix’s earnings, let’s see what the company has been up to before its quarterly report…
Last October, Netflix announced that it will crack down on password sharing at the start of this year. The company will start charging an additional fee to those who share their accounts with people outside of their household. Subscribers who want to keep sharing their account will be able to pay for sub-accounts for extra members. Users who have been borrowing someone else’s account will be able to transfer their viewing history and personalized recommendation to their own account. The company expects this last option to be “especially popular” among password sharers.
Then in November, the streaming giant added a new membership tier called “Basic With Ads.” This new tier is Netflix’s cheapest – at $6.99. In comparison, the next plan, “Basic”, cost $9.99.
And the reason for the price drop is all in the name. Ads.
Netflix has previously resisted any advertisements on its platform for years. But conceding to ads will allow the company to attract – or keep – the subscribers it desperately needs. In the first quarter of 2022, Netflix lost 200,00 subscribers. And it lost nearly a million in the second quarter.
Inflation and competition from services like The Walt Disney Company’s (DIS) Disney+ are partly to blame for the subscriber exodus. In fact, Disney+ added 14.4 million customers during the third quarter, while Netflix only added 2.41 million.
Because of declining subscriber numbers, the fourth quarter is the first that Netflix ditched guidance on subscriber growth and focused instead on financial numbers, like earnings, revenue, and operating margin. This change was made in an attempt to emphasize profitability over subscriber growth.
So with that, let’s get into the numbers…
For the quarter, Netflix reported earnings of $0.12 per share, down a whopping 91% from earnings of $1.33 per share in the same quarter last year. Analysts were calling for earnings of $0.45 per share, so Netflix missed estimates by 73.3%. Revenue of $7.85 billion was up slightly from $7.71 billion a year ago. This was in line with analysts’ expectations.
Although earnings missed estimates by a wide margin, the stock got a 7% lift from the new subscriber numbers as of this afternoon. In a huge surprise, Netflix added 7.66 million paid subscribers in the fourth quarter – topping the company’s own (and final) forecast of 4.5 million.
Looking to the first quarter of 2023, Netflix anticipates that revenue will rise 3.9% to $8.17 billion, with growth driven by more paid memberships and more money per paid membership. Earnings per share are forecast to come in at $2.82, down from earnings per share of $3.53 a year ago.
Company management stated in its letter to shareholders:
2022 was a tough year, with a bumpy start but a brighter finish. We believe we have a clear path to reaccelerate our revenue growth: continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering. As always, our north stars remain pleasing our members and building even greater profitability over time.
They also revealed that Reed Hastings, one of the founders of Netflix and CEO for the past 25 years, would be leaving his position as CEO and instead take on the role of Executive Chairman.
Despite the positive subscriber growth and pop in the stock, this is not a stock I would jump on right now. The reality is the significant earnings decline is concerning, and I don’t like that earnings are expected to fall in the first quarter as well. The revenue growth isn’t much to write home about either.
Instead, I would focus on stocks with strong fundamentals, i.e., companies that are consistently growing their sales and earnings and posting positive forward-looking guidance. I am confident that these companies will emerge as the market leaders in the current environment.
This is why I’ve been spending the past year loading up on fundamentally superior stocks – like energy – in Growth Investor. I want to ensure that we’re invested in the companies that will profit from the high energy demand. These stocks are an oasis for investors seeking steady sales and earnings growth.
If you want to position your portfolio for big profits, become a member of Growth Investor today. You’ll get access to two Buy Lists: my High-Growth Investments and Elite Dividend Payers. I also include Top Stocks lists, which are select lists of stocks from my Buy Lists that are backed by persistent institutional buying pressure and stunning fundamentals that should be go-to names for investors in the coming weeks and months.
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