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Netflix - better than expected results

Netflix's fourth quarter subscriber growth was better than analysts expected, rising 12.8%, taking the total to 260.3m.

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Netflix's fourth quarter subscriber growth was better than analysts expected, rising 12.8%, taking the total to 260.3mn. Revenue rose 12.5% to $8.8bn, and was also ahead of expectations. Performance was helped by the effect of password-sharing crackdowns. Operating profit rose to $1.5bn from $550mn the previous year.

Netflix generated free cash flow of $6.9bn for the year as a whole. Net debt stood at $11.9bn at the end of the period, including short-term obligations for content.

The group's cheaper ad supported tier is expected to grow strongly this year but from a small base. Netflix expects double digit revenue growth for the full year and has upgraded its operating margin forecast to 24% from 22 - 23%.

The shares rose 8.6% in pre-market trading.

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Our view

Netflix has had an impressive fourth quarter. Subscriber numbers have continued to climb and margins are on the up. Growth has been largely driven by password sharing crackdowns. That's good going but can't be relied on forever.

Instead, the group needs to prove it can organically attract and retain customers moving forward. It's doing just that.

Netflix's ability to reduce churn (customers flipflopping to rivals) is firmly rooted in its best-in-class original content. Audiences engage more with original content, and while it's expensive to make, it does keep eyeballs on screens in a bigger way. That's partly why Netflix spends about $17bn a year on content in normal times (spending was lower last year because of the writers and actors strikes).

And keeping eyes glued to the Netflix app is front of mind in the inflationary environment, which is why the ad-supported tier was born. Initial progress seems positive, but we are realms away from knowing for sure if this venture is the cash cow it's been sold as. Netflix needs to squeeze as much juice as it can from different avenues, given a recent lack of price increases could suggest that inflation is starting to bite Netflix's ability to crank up its subscription price, as households look to trim their spending.

The group also has a market-leading international production and distribution network. Doing localised content right isn't easy and Netflix has an enviable footprint here. This is important because longer-term subscriber growth will need to come from emerging markets.

Looking nearer-term, Netflix faces challenges of the economic variety in its core markets like the US and UK. As people dial down spending in the wake of inflation, the risk from fever-pitch competition has increased. While cheaper plan options will help mitigate this, Netflix can't take its foot off the gas - there are plenty of rivals waiting in the wings to pounce on market share.

The balance sheet, although carrying a fair whack of debt, isn't in bad health. That said, investors shouldn't be holding their breath for shareholder returns any time soon. The priority now is investing in the business and content for growth.

Netflix is a market leader, and there are plenty of moving parts these days which could add up to longer-term growth. We also note the valuation isn't as unreasonable as it has been however this is likely to fluctuate with the wider market mood music, which will depend on the performance of major western economies. There are of course no guarantees.

Netflix key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 24th January 2024