Netflix (NFLX) reported significant fourth-quarter subscriber additions with strength across all regions, and average revenue per member (ARM) was up after several quarters of decline, resulting in significant sales growth acceleration. We see further tailwinds to ARM over the next few years but believe subscriber growth will slow. We’re raising our fair value estimate to $425 from $410 after incorporating the results and management’s 2024 outlook, but we believe the stock has gotten ahead of itself even as we expect Netflix to remain dominant.
Fourth-quarter revenue grew 13% year over year as Netflix added over 13 million net global subscribers, the most since the first quarter of 2020, and every region added more net subscribers than it had since the first or second quarter of 2020 when pandemic-related lockdowns had just begun.
The firm added 2.8 million net subscribers in the US and Canada. While we project subscriber growth will remain relatively high, we think the catalysts that led to outsize growth last year will significantly subside in 2024. Netflix began to crack down on password sharing at the beginning of 2023 and gradually rolled out the policy throughout different markets while simultaneously offering new options for lower-priced ad-supported subscriptions or member additions to existing plans.
Key Morningstar Metrics for Netflix
• Fair Value Estimate: $425
• Morningstar Rating: ★★;
• Morningstar Economic Moat Rating: Narrow;
• Morningstar Uncertainty Rating: High.
Subscription Price Increases
ARM grew 1% year over year in the fourth quarter, helped by price increases in the US, the UK, and France, and we think Netflix has room to increase ARM materially over the next few years on the back of its advertising revenue stream.
Netflix continues to realise significant operating leverage. The firm’s operating margin was 17% in the fourth quarter and over 20% for the full year, up nearly three percentage points from 2022. Management expects a margin of 24% in 2024. Free cash flow was about $7 billion in 2023, but about $1 billion in anticipated content spending was delayed due to the strikes. We project over $6 billion in free cash flow in 2024.
