After the release of its earnings report on Jan. 23, streaming giant Netflix Inc. (NFLX, Financial) saw a big 10.7% jump in share price. The company's financials reflected the positive impact of its recent endeavours taken to boost growth after the pandemic-driven spurt died down and as competition heats up. This marks a good start to 2024 for the stock, which is up 16% for the year so far.
Revenue and operating margins show upside
While full-year revenue growth at 6.70% was only a tad higher than the 6.50% for 2022, the figure for the final quarter of the year was notable. It came in at 12.50% year over year, compared to the expectation of a 10.7% increase. That the company forecast revenues to grow in double digits for the first time in two years was notable enough, but that it came in even better than expected makes it all the more significant.
The company's full-year operating margins came in at 20.60%, slightly outdoing the company's upwardly revised expectation of 20%, which was at the top end of its earlier guidance range of 18% to 20%. The figure was also higher compared to the 17.80% margin in 2022.
The operating income margin also rose to 16.60% in the fourth quarter, outstripping the projection of 13.30% as revenue was better than expected and planned spending was lower as well. The results were supported by a 12.80% increase in global streaming paid memberships.
Net income grows, but less than expected
However, the net income did not do as well, coming in 1.90% lower than the forecasts. As a result, the diluted earnings per share came in at $2.11 compared to the expectation of $2.15. However, the number is still higher by 17.60 times than last year's figure, which was particularly low due to unfavourable exchange rates. As a result of several quarters of earnings improvements, the full-year figure showed a 21% rise to $12.
Continued improved performance expected
Netflix expects the healthy performance to continue. Notably, it projects revenue growth to jump to double digits again for full-year 2024 on a neutral exchange rate basis, after seeing single-digit growth in the past two years. The operating margin is expected to increase by 24%, an upgrade from the 22% to 23% increase seen earlier.
This uptick in the forecast is expected to be seen from the first quarter of 2024 onwards (see table above for details of the forecast), with the most striking feature being the jump in operating margin to 26.20%, which is higher than even the full-year forecast.
Strategic changes and plans ahead
The improved performance and forecasts follow the company's strategic changes that included the introduction of advertisement-based memberships at lower prices, increased charges for regular subscribers and the discouragement of password sharing.
Ad-based memberships have been quite successful, with 70% sequential growth in the fourth quarter. In fact, these memberships are 40% of Netflix signups in its ads markets now, leading the company to plan retiring the basic plan in some of its ad markets like the U.K. and Canada in the second quarter of 2024.
Further, while Netflix continues to be the leader in streaming across a number of markets (see chart above), it also plans to expand its offerings to the likes of live games. This is not just as competition increases in streaming services, but also due to divided consumer time for entertainment because of social media channels like Instagram and TikTok.
Forecasting EPS and assessing market multiples
While the latest numbers and the expansion in offerings bode well for the company, the question now is what they mean for the stock. To get a sense of Netflix's forward price-earnings ratio for 2024, I made estimates of its earnings per share for the year.
The full-year revenue is assumed to grow at 12.50%, the same as in the fourth quarter of 2023 and in line with the company's forecast of double-digit expansion. Although it expects the operating margin to be higher, which can also spill into the net margin, here I have conservatively assumed the net margin will stay static at 2023's level of 16%.
If the weighted average common shares outstanding stay the same as in 2023, the earnings per share come in at $13.50, which is a 12.5% increase over last year and results in a forward earnings multiple of 41.70 times. This is below the average of the past five years' year-end forward price-earnings ratio of 45.40. This means Netflix's stock still has upside.
In conclusion
All in all, Netflix had a good 2023. The uptick in revenue in the fourth quarter is particularly encouraging and on a full-year basis, the operating margin looks good too. In 2024, the company expects to see continued revenue growth and expanding margins, supported by its strategic actions and improved offerings, which is encouraging for the stock going forward. Its forward price-earnings ratio also gives a reason to expect a price upside for the stock.
