What Happened: Shares of streaming video giant Netflix (NASDAQ: NASDAQ:) fell 8.2% in the morning session after the company reported fourth-quarter results and gave disappointing revenue guidance, with full-year sales guidance calling for growth of 13-15% implied. This represents a slowdown compared to expectations for 15-16% growth in early 2024.
Also, the company surprisingly announced that it will stop reporting subscriber counts starting in the first quarter of 2025, given recent trends in its business model, including “new pricing and multi-tier plans with different price points in different countries.” ”
Co-CEO Greg Peters further explained the reason for the change, adding: “…So each additional member has a different business impact. And all that means is the historical simple math we’ve all done: the number of members times the monthly price is increasingly less accurate in capturing the state of the business.”
On the other hand, Netflix beat analyst estimates on almost every metric we track: paid subscribers, revenue, operating income, earnings per share and free cash flow. It raised expectations for operating profitability as margins grew seven percentage points year-on-year to 28% this quarter.
One key thing to watch for Netflix in the coming quarters is its new ad-supported membership tier, with ad-supported membership growing by 65% compared to Q4 2023. Additionally, more than 40% of the new registrations result from this plan. This performance is certainly proof that the strategy is working.
Overall, this was a mixed quarter for Netflix. The market probably expected higher turnover figures.
The stock market overreacts to news, and big price drops can provide good opportunities to buy high-quality stocks. Is Now the Time to Buy Netflix? Find out by reading the original article on StockStory.
What the market tells us: Netflix stock is quite volatile, having seen seven moves of more than 5% in the past year. In context, today’s move indicates that the market sees this news as meaningful, but not as something that would fundamentally change its perception of the company.
The biggest move we wrote about in the past year was six months ago, when shares gained 10% on news that the company reported its Q3 2023 earnings. It was a strong quarter, with Netflix posting net streaming additions (primarily its paying subscribers) that exceeded expectations across all regions (8.8 million net additions vs. Wall Street estimates of 6.0 million). This increase was driven by new releases such as One Piece and the continuation of existing hits such as The Witcher. There’s likely some extra excitement around this quarter’s higher-than-expected numbers since Netflix rolled out paid sharing earlier this summer, making investors wary about whether subscribers would leave.
On the other hand, fourth-quarter revenue expectations were below expectations, but the company bullishly raised its full-year outlook for both operating margin and free cash flow. Netflix also repurchased $2.5 billion in outstanding shares this quarter, well above the $1+ billion in buybacks in the first six months. With a new buyback approval and a higher free cash flow outlook, buyback activity could remain strong (a boost to the company’s share price).
Overall, the results weren’t perfect, but still quite strong, mainly due to fears about what the development of paid sharing could do to churn. Given how quickly sentiment has turned bearish this year, we’re not too surprised by the market’s positive reaction.
Netflix is up 19.2% year-to-date, but at $559.53 per share is still trading 12% below its 52-week high of $636.18 set in April 2024. Investors who bought it five years ago bought $1,000 worth of Netflix stock would now be looking for an investment worth $1,480.
