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Netflix (NFLX) Q4 Previews: Will advertising and gaming platform drive profitability?

AInvestMonday, Jan 22, 2024 12:17 pm ET
3min read

Netflix has emerged as the clear winner in the streaming wars, with changing market dynamics and a focus on profitability forcing other media companies to reevaluate their streaming aspirations. With a subscriber base of over 247.15 million as of the third quarter of 2023, Netflix continues to expand its reach and solidify its position as a leading content provider. The Q4 earnings report on January 23rd will be a significant indicator of Netflix's current performance and future outlook. The following is a preview of report and breakdown of key stories to track. 

While some companies have reduced their content spend and increased third-party licensing, Netflix continues to expand its global reach and scale in streaming. The availability to purchase third-party content allows Netflix to drive efficiencies in its content spend and supplement new productions with established content. 

On the financial front, Netflix is projected to see strong revenue growth, with adjusted forecasts predicting fourth-quarter revenue of $8.79 billion and operating income of $1.22 billion. 

One factor that could further boost Netflix's growth potential is its crackdown on password sharing. By offering an ad-supported tier priced at $6.99, Netflix provides a low-cost option for users who wish to access the service without sharing passwords. The $6.99 ad-supported tier has seen rapid growth, reaching 23 million active users recently, up significantly from 15 million in November and 5 million in May. The broader crackdown on password sharing is expected to accelerate the adoption of Netflix's ad-supported tier. As the company continues to refine and expand this offering, it could drive further growth and market share gains.

The company's successful crackdown on password sharing and the introduction of the ad-supported tier have led to a resurgence in subscriber growth. In the third quarter of 2023, Netflix added 8.76 million subscribers worldwide , surpassing analyst expectations.

The company's substantial free cash flow generation positions it well to drive shareholder returns, as evidenced by its increased buyback authorization of $10 billion. 

There are differing opinions on Netflix's future growth prospects, with analysts downgrading the stock due to concerns about falling growth and high revenue expectations, others remain positive. 

Oppenheimer raised their price target for NFLX to $600, citing the accelerating pace of ad subscriptions and the potential for continued subscriber growth. They believe Netflix has plenty of room for growth in 2024 and conservatively raise their net additions estimate for the fourth quarter. Wolfe Research downgraded Netflix to Peer Perform, citing concerns over 2024 revenue and growth expectations. Citi downgraded Netflix from Buy to Neutral, balancing potential risks and rewards at current levels.

Netflix's foray into mobile gaming is another area of interest. While the company is relatively new to the gaming space, it has quickly expanded its offerings and shows seriousness in becoming an established player. Netflix currently offers over 80 games to its subscribers, with plans to explore additional revenue streams through in-app purchases or ads. 

Netflix is exploring monetization of its gaming division, including in-app purchases and ads for subscribers on the ad-tier, tapping into a significant market opportunity. Monetizing its gaming division could unlock massive potential for Netflix , especially considering the company's focus on attractive IP and content. While the company is yet to monetize this offering, the potential for in-app purchases and advertising could generate substantial revenue in the future.

In summary, Netflix has solidified its position as the streaming leader, benefiting from changing market dynamics and an emphasis on profitability. The crackdown on password sharing, the ad-supported tier, and the potential of mobile gaming all contribute to Netflix's growth potential. With a strong brand, a global subscriber base, and innovative strategies, Netflix is well-positioned for future success. Despite facing competition from traditional media companies and other streaming services, Netflix's strong brand, leading global subscriber base, and position as an innovator have enabled it to maintain its competitive advantage. 

The company's focus on profitability and revenue growth through its advertising-supported tier and monetization of account sharing also bodes well for its long-term investment value. 

Netflix is not without its challenges. The company's reliance on subscriber growth and its increasing content spend could impact profitability and cash flow in the near term. Additionally, the ongoing consolidation in the streaming market could lead to increased competition and potential market share losses. 

After a 51% stock tumble in 2022 due to subscriber growth issues, Netflix rebounded in 2023 with a 65% increase, aided by new service tiers and policy changes. Despite a mixed financial forecast for Q4, Netflix's stock surged 16.1% after Q3 results, indicating market confidence.

Netflix remains a compelling investment opportunity with significant growth potential. The company's focus on local-language content production, entry into mobile gaming, and lower-cost advertising-supported service tier have positioned it well for future success. While there are risks and challenges to consider, Netflix's strong brand, leading global subscriber base, and commitment to profitability make it a compelling long-term investment. Disclaimer: The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of any other entity. The author does not own any stocks mentioned in this article and is not offering financial advice. Please conduct your own research and consult with a financial advisor before making investment decisions.

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