Some important metrics look good, but a key leader is leaving at the same time that the competition is getting stronger.
Most people who read this article probably have strong feelings about where Netflix (NFLX -0.13%), one of the best-known consumer-facing internet businesses, is going. The global leader in entertainment is going through some interesting changes that could help it in the long run or make it less important over time.
Let’s think about the good and bad things that could happen to this streaming leader between now and 2023 and beyond.
The bulls are making a move
After losing 1.2 million subscribers in the first half of 2022, sceptics thought Netflix’s days of growing quickly were over. But Netflix showed that this wasn’t true when it added 7.7 million customers in the fourth quarter, which was a lot more than what management had expected. Even the mature UCAN (U.S. and Canada) region gained users, showing that there is still demand for great content here at home.
The cheaper Netflix plan that includes ads is looking good. One thing is that these users are just as interested as those who don’t see ads. Also, management isn’t seeing a lot of customers who are already on ad-free plans switch to a plan with ads. That’s a good sign for the ad tier’s potential to bring in more money.
This is a new stage in the company’s life, one in which we can expect it to consistently make money (FCF). In 2022, Netflix’s FCF was $1.6 billion, and the company’s leaders expect it to be $3 billion this year. Investors have been waiting for this moment for a long time, wondering if the business would ever grow big enough to stop losing money. Now is the right time.
And this could lead the company to buy back its own shares in 2023. Investors shouldn’t be surprised by the return on capital because the company spent so much time investing in its core business and keeping enough cash on hand. This isn’t the Netflix we’ve grown accustomed to over the past ten years.
The company’s current value is another strong point in its favour. As of this writing, shares are trading at a price-to-earnings (P/E) multiple of 36, which is about the same price as Netflix has sold for over the past 10 years. And the business is expected to grow its earnings per share at a compound annual rate of 19.7% between 2022 and 2027, according to estimates from Wall Street. This means that investors could get a lot of growth for what might seem like a high relative valuation.
The bears are putting the brakes on
Even though Netflix is adding a lot of new members, bears will quickly point out that sales are slowing down. In the fourth quarter of 2022, sales of $7.9 billion were only up 1.9% from the same time the year before, or 10% when prices were kept the same. This is a big slowdown compared to the company’s average annual growth rate of 27.4% between 2016 and 2021.
The average revenue per member (ARM) only went up 5% when prices were kept the same. This makes me wonder how much pricing power Netflix still has, especially in the U.S. Also, as more users come from international markets, where plans are cheaper, this will keep putting pressure on revenue and ARM gains.
Streaming services are plentiful, to the point where consumers may feel overwhelmed. There is a certain amount of time in a day, and formidable rivals have the resources and original ideas to grab consumers’ focus.
Since content is so easy to get these days, Netflix will have to keep spending tens of billions of dollars every year to get new subscribers and keep the ones it already has. As it did for most of the 2010s, the company can’t just count on the fact that its service is better than cable TV. The cost of getting customers will go up.
Reed Hastings’s departure from his role as co-CEO is another sign that Netflix has moved into a new phase. Hastings has been the CEO since 1998. He will now be the executive chairman instead of running the day-to-day business.
The tech visionary who correctly bet on the growing popularity of video entertainment that can be watched online has led Netflix through its many strategic shifts over the years. Investors might be a little more worried now that Hastings isn’t there to steer the ship as the company moves into digital advertising and keeps putting money into games.