The tide is turning in favor of streaming giant Netflix Inc. (NFLX, Financial), which reported a third consecutive quarter of accelerated growth.
It is a storyline that found its way into several competing analyses and lends at least a bit of credence, as there was fear a recent aggressive password-sharing crackdown would hurt the company's fortunes. Regardless, the video streaming juggernaut reported the strongest customer additions in the first quarter since the pandemic, underscoring how its offerings resonate with subscribers in the highly competitive streaming sector.
Declining subscription market share
The company added 9.33 million subscribers in the first quarter, five times the number it added in the same quarter last year, affirming the need to continue limiting the password-sharing trend.
After management confirmed they will no longer report subscriber metrics, Netflix's stock came under pressure. The announcement took the markets by storm, as most quarters interpreted it as a warning that the streaming heavyweight feared it would start losing subscribers.
Nevertheless, it is not the only company ceasing to report key subscriber numbers. Facebook parent Meta Platforms (META, Financial) and X, formerly Twitter, also stopped disclosing active monthly users as growth began to slow.
Soaring competition in the streaming business has been a concern, with various companies revamping their libraries and investing in new content to attract and retain subscribers.
Netflix has seen its market share in the video streaming sector shrink from record highs of 48% in 2019 to current lows of 26%. The slump has come as a result of aggressive competition from other legacy media companies, including Disney Plus from Disney (DIS, Financial), Paramount's (PARA, Financial) Paramount Plus, Amazon's (AMZN, Financial) Prime Video service and Peacock, among others, using their muscles in this lucrative content streaming business.
Source: Indiewire
Netflix's $17 billion content spending boost
Despite the huge decline in market share, Netflix keeps adding more subscribers, investing almost $13 billion last year in developing and licensing new content. Equally, the company has announced that in 2024, it intends to spend around $17 billion to help fortify the content library as part of its initiative to shore up a competitive edge in the market and remain attractive to new customers.
For instance, it is because of great investments in content that the company could attract 9.33 million subscribers in the first quarter. It marked an increase from the 13.30 million that Netflix managed in the fourth quarter of last year. Still, the service was more optimistic and bullish, with a possibility of topping analysts' estimates. There was an increment in the positive trend, as confirmed by the giant streaming service, which reported a rise of 16% in paid subscribers to 270 million during the first quarter of this year.
According to startup advisor Keith Donovan, Netflix is broadening its appeal and subscriber base through various strategic enhancements to its service. By offering diverse content, including popular shows and films, and licensing additional shows from competitors, the company aims to attract new users and retain existing ones. Lastly, the company has begun branching out into live sports and video games, adding unique experiences like live boxing matches and the Grand Theft Auto franchise.
Revenue growth on ad tier plan
The 16% jump in subscriptions is one reason why Netflix delivered better-than-expected first-quarter results, which underlined growth in the core business. Revenue jumped nearly 15% to $9.37 billion, attributing to membership growth and a strong pricing strategy.
The streaming giant has seen its most robust growth since the pandemic, with more than 22 million people signing up for the service in the second half of last year. The subscription-based growth comes even with the company curbing the sharing of passwords worldwide.
Additionally, the company's ad-tier plan, which costs $6.99 a month in the U.S., has proved to be a great hit, attracting a massive following in the market. Consequently, Netflix continues to register a significant jump in subscriber growth in its ad-tier plan for $6.99, thus appealing to the mass market. The package is expected to attract over 13.50 million subscribers, which should continue rising until 2028. The ad-tier plan accounts for about 30% of all new sign-ups in the 12 available countries.
Image Source: Reuters
Advertising and live-streaming opportunity
The growing popularity of the ad-tier plan promises to unlock a massive opportunity for Netflix, even as it generates a good chunk of its revenue from content streaming. Through advertising on the platform, the company stands to attract a significant chunk of the advertising budgets from some of the biggest brands.
The fact the ad tier plan added 13 million new subscribers in the quarter presents a unique target market that brands could look to target through advertising campaigns. Additionally, with an audience of more than a quarter a billion people worldwide, the company has what it takes to compete in digital advertising against other big brands. In return, Netflix should be able to generate advertising revenue, consequently diversifying its revenue base.
Initial estimates indicate advertising revenue due to the ad tier plan could rise to nearly $1 billion by the end of the year as more people sign up for the $6.99-a-month plan. In addition to pursuing advertising revenues, Netflix is expanding its footprint into live-streaming sports programming. The push has emerged as a pivotal strategy for the company to explore ways of strengthening its bottom-line growth.
Live programming promises to strengthen the company's competitive edge, setting the stage for it to take on the likes of Amazon, which already offers live programming. The company has already inked a $5 billion deal that will see WWE stream live events on its platform starting in 2025. The WWE deal will expand the company's live programming, including the reality show "Love Is Blind." Lastly, it has also confirmed plans to livestream the much-anticipated boxing match between Mike Tyson and influencer-turned-boxer Jake Paul.
Image Source: Reuters
Valuation
A 250%-plus rally from 2022 lows only underscores Netflix's resilience and its adaptability to market conditions and competition changes. The stock is off 12% from all-time highs, but continues to trade at a premium with a price-earnings ratio of 42.
Although Netflix may seem overvalued at its current price, the company's strong performance and strategic initiatives fully justify its premium valuation.
Additionally, the company has fortified its financial position, demonstrating its strength by generating a substantial $2.20 billion in net cash from operating activities in the first quarter and reporting free cash flow of $2.10 billion. Exiting the quarter with $14 billion in gross debt, the company holds a reassuring $7 billion in cash and cash equivalents.
Lastly, with a target of achieving a free cash flow of $6 billion by 2024, Netflix is well-positioned to maintain its liquidity and balance sheet.
Bottom line
After imploding throughout 2022, Netflix is on the move again, this time with an improvement in fundamentals. The company is now firm amidst a post-pandemic slowdown, fierce competition and a wider macroeconomic headwind.
At the same time, high spending on content has begun to pay off as it has attracted and retained over 270 million paying subscribers.
Lastly, the company's ventures into the advertising business and sports live streaming strengthen its growth metrics. Thus, Netflix remains a solid long-term investment play in the burgeoning content streaming landscape.
