In the last quarter, Netflix gained 8.76 million new subscription users, surpassing company guidance, thanks to its advertising support plan and measures to combat password sharing in the North American market. Subscriptions for the advertising package increased by 70% sequentially.
The year-over-year decrease in ARPU (average revenue per user) was marginal, attributed to the growth of users in developing countries and regions, offsetting the overall user average. This dynamic resulted in a 7.8% year-over-year revenue increase to $8.54 billion, with a quarterly operating profit margin of 22.4%, exceeding the market's expected 22.1% and higher than the previous year's 19.3%.
Netflix’s stock rose by 65.1% in 2023, experiencing a continuous three-month increase after the Q3 report, reaching its highest point since January 2022.
Netflix Q4 preview
Netflix is set to release its Q4 and full-year performance on 23 January. In the previous quarter's earnings conference, management did not provide explicit user guidance, but growth similar to Q3 is expected.
Netflix management anticipates an 11% year-over-year increase in revenue to $8.7 billion for Q4. The company has also raised the profit margin guidance, expecting a 20% operating profit margin for the full year of 2023, compared to the previous expectation of 18% - 20%.
The free cash flow for the last quarter was $1.89 billion, significantly better than expected, partly due to reduced content spending resulting from the Writers Guild of America strike action in 2023. Netflix has increased the full-year 2023 free cash flow target to $6.5 billion, up from $5 billion.
However, the spending reduction in Q3 appears to be a passive decline, and with film and television workers returning to their jobs, content spending costs may increase in the long term. Profit growth still relies on revenue growth, and the price hike measures could boost investor confidence in Netflix's ability to maintain high growth at this stage, supporting the continuous rise in stock prices.
Netflix in 2024
After failing to break the $500 mark on 20 December 2023, Netflix's stock has exhibited a recent trend of oscillation at high levels.
The impact of the password-sharing crackdown strategy has been more effective than market expectations, boosting the company's overall valuation, with a P/E ratio reaching 47.3 compared to 29.2 at the end of 2022.
From a long-term perspective, the company's stock price will still depend on its profit-making ability. The surge in November-December was also influenced by the Federal Reserve's interest rate cut expectations in 2024.
However, in the current high-interest environment, overall consumer spending is expected to slow down, and if the interest rate cut falls short of expectations, it may also affect consumer sentiment.
The user growth resulting from the password-sharing crackdown may support strong performance for a certain period, but it is not the logic for long-term growth. Future stock price trends may still depend on cost control by the company, such as increasing profitability through lower overseas creative team costs, as seen in the highly successful Korean drama "Squid Game."
Another important growth engine for Netflix in the future could be the rapid development of generative AI, as an increasing number of generative AI video content enters the market. AI can efficiently generate video content that better aligns with user preferences, meaning higher efficiency and lower costs, which could become a key factor influencing Netflix's stock price.
Considering that the current stock price has to some extent already priced in the potential growth for Q4 from the end of last year, the market may focus more on the guidance for 2024. The short-term overvaluation of stock prices and the impact of a high-interest environment on consumer spending may create a deviation, implying that chasing the current rise may no longer be suitable.
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