Netflix (NFLX.O) finds itself on a perpetual treadmill, with investors closely monitoring its pursuit of growth. While rivals prioritize profits over expansion, Netflix’s stock surged by 8% post-market on Tuesday, following a report of better-than-expected quarterly subscriber additions. Co-Chief Executives Ted Sarandos and Greg Peters revealed that the streaming giant attracted 13 million additional subscribers in Q4, surpassing analysts’ forecasts and reaching a total of 260 million paid members globally.
New advertising tiers introduced in November 2022 have contributed to this growth. By offering a lower-priced option with commercials and compelling those sharing accounts to subscribe, Netflix witnessed a notable increase in new customers. Although the specific impact of these tiers and advertising revenue is not disclosed, the overall rise in subscribers reflects their positive influence.
Despite Netflix’s position as a streaming leader, boasting both subscriber increase and a Q4 operating margin of 17%, double that of 2022, challenges lie ahead. The company acknowledges the need for increased spending to sustain growth, with content amortization tripling from 2016 to $14.2 billion last year. For the upcoming year, Netflix forecasts a high single-digit percentage YoY increase in spending on TV shows and movies.
Recognizing the importance of diversifying content offerings to satisfy existing customers and attract new ones, Netflix announced a 10-year programming agreement with TKO (TKO.N), the owner of WWE, to broadcast live episodic wrestling matches for $5 billion. This agreement represents 7% of Netflix’s free cash flow of $6.9 billion in the previous year.
Despite its strong performance, Netflix faces scrutiny, trading at nearly 30 times earnings for the next 12 months, comparable to Microsoft (MSFT.O) and higher than Meta Platforms’ (META.O) 20 times. This valuation raises concerns about Netflix’s ability to sustain its current pace of growth in the competitive streaming landscape.