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What Happened:
Shares of streaming video giant Netflix (NASDAQ: NFLX) jumped 7.9% in the afternoon session after the company reported fourth quarter results that exceeded Wall Street’s revenue expectations with strong user growth. The 13.1 million net adds from last quarter were well above expectations of 8.8 million. ARPU also outperformed slightly in every geography except Asia-Pacific, driving the revenue beat.
Looking ahead, the company called for 16% revenue growth year on year when excluding the impacts of foreign exchange, which was robust. The company also upped its full year operating margin guidance and gave EPS guidance above expectations. The company’s paid sharing and ad-supported product tier had added to uncertainty about the direction of the company and its fundamentals when first announced, but this quarter reassured the market that these are likely great decisions on Netflix management’s part (although it is still early). On the advertising, the company said that “scaling our ads business represents an opportunity to tap into significant new revenue and profit pools over the medium to longer term. In Q4’23, like the quarter before, our ads membership increased by nearly 70% quarter over quarter, supported by improvements in our offering.” Finally, the company struck a bullish tone when speaking about bigger picture competition, saying that industry consolidating is expected but that its opportunity remains vast. Netflix’s subtle hints in its shareholder letter that it has pricing power and may continue to “ask members to pay a little extra” speak to the value, stickiness, and innovation in the product platform.
Overall, it was a strong quarter, showing that the company is staying on track, with the results setting a positive tone for stocks heading into the new earnings season, especially tech names. Following the results, Macquarie analyst Tim Nollen upgraded the stock’s rating from Neutral to Outperform and raised the price target from $410 to $595.
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What is the market telling us:
Netflix’s shares are quite volatile and over the last year have had 7 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 9 months ago, when the company dropped 12.5% on the news that reported slightly weaker-than-expected sales for the first quarter. In addition, it guided to weaker sales and operating profits for the next quarter vs. Consensus analyst expectations. The company also moved the wider rollout of its paid-sharing feature from late Q1 to Q2 (the revenue impact will come in Q3). The feature is intended to reduce password sharing, and analysts view it as a potential revenue tailwind.
Netflix is up 17.3% since the beginning of the year. Investors who bought $1,000 worth of Netflix’s shares 5 years ago would now be looking at an investment worth $1,683.
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