If you look at Netflix‘s (NFLX -1.12%) Recent stock performance suggests that the movie streamer business is booming. Shares are up 24% over the past month and 62% over the past six months, more than doubling since the lows last May.
But fourth-quarter revenue was meager, profits plummeted, and Netflix posted its slowest year-end subscriber growth in over a decade. That’s not a performance that should evoke such a violent reaction in its stock. And now, founder and CEO Reed Hastings is stepping down to take on the role of executive chairman, marking the end of an era for the streamer.
Without question, Hastings has made Netflix an industry powerhouse, but this next phase comes at a turbulent time for media companies. Investors need to figure out if this changing of the guard will allow Netflix to return to a growth story — or are the 30,000% gains since the IPO the best investors they can hope for?
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Nothing is the same
Co-CEOs Ted Sarandos and Greg Peters replace Hastings. While it’s not a new situation for Netflix — Sarandos has been Hastings’ co-CEO since 2020 — conventional wisdom says splitting the top spot is a bad idea. However, a Harvard Business Review study shows that companies with co-CEOs actually do better than those with a single CEO, 9.5% to 6.9%, with nearly 60% of companies with shared responsibilities performing better at the highest level.
However, Netflix’s track record as co-CEO is a disappointing 32% loss in shareholder value, and while two heads are better than one, too many cooks can also spoil the broth.
But Netflix has bigger problems than how many people are steering the ship. It’s possible that the industry has peaked as, with so many options to choose from, consumers are more discerning about which streaming video service to sign up with. Netflix is no longer the obvious choice for every media streaming consumer.
A decade of striving for quantity over quality in original programming has resulted in Netflix ranking last in customer satisfaction surveys in terms of perceived value. Additionally, analysts at MoffettNathanson recently concluded that streaming isn’t the business it once was, and many will be unable to engage in an unworldly pursuit of profits that doesn’t exist.
For many players, they wrote: “Cashflows are sad ghosts of their former selves. Balance sheets are burdened with debt in an environment of higher interest rates. Rather than being the new slice of bread, investors and executives have accepted that streaming is indeed , not a good deal — at least compared to what came before.”
An improving financial picture
Still, that’s not the picture Netflix is seeing. The company ended the year with free cash flow (FCF) of $1.6 billion, ahead of its guidance of $1 billion, and forecasts to end 2023 with FCF of $3 billion. That should allow the streamer to start buying back its shares.
It has $14 billion in long-term debt, at the high end of its target range of $10 billion to $15 billion, but it also has $6 billion in cash and short-term investments.
Sarandos claims that streaming is still in its infancy as it only accounts for 8% of TV time even after all these years, suggesting there’s still plenty of room for growth. The key is content. “When the content works, the business works. We increase engagement. We increase sales. We increase profits.”
That could prove difficult for Netflix. While the streamer is now focusing on higher quality content and had some of the most watched shows on TV last year, it hasn’t been able to attract many new subscribers despite spending a lot of money to get them.
Netflix’s 2022 marketing spend was $2.53 billion on 8.9 million net adds, or about $284 each. Obviously, some of that money goes into retaining existing customers, but it’s an expense that’s rising, as Netflix spent $140 per net increment in 2021 and just $60 in 2020 (of course, streamers haven’t had to much due to the pandemic lockdown conduct marketing). anything to get viewers to subscribe).
Image source: Getty Images.
Throw ideas at the wall
However, the jury is out on some of Netflix’s latest initiatives. For example, the ad-supported subscription tier that launched in November got off to a slow start, with early reports saying Netflix was forced to pay back money to advertisers because promised views didn’t materialize.
However, Peters claims that the ad-supported tier ultimately accounts for 10% of sales and can reach as high as 10% Disney‘s Hulu, which generates over $1 billion annually.
Netflix is also dabbling in gaming, fitness streaming, and live streaming events. Some of these are too new to draw conclusions, but it suggests that even Netflix is convinced that streaming movies alone can no longer sustain the company.
The ship has sailed
With stiff competition for eyeballs, falling profits, membership growth at its lowest level in years, and mixed new ventures at best, Netflix seems like a tough decision to buy. Whatever good news the streamer shared in its quarterly earnings report appears to be already priced into the stock. At 36 times earnings, 4 times sales, and 222 times free cash flow generated, Netflix stock isn’t cheap.
While the streamer appears to be in good financial health, investors would be best served to wait for more clarity on whether it can regain its status as a growing company before buying Netflix stock.
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