Netflix investors won’t let it off the treadmill

Netflix opens new tab is stuck on the treadmill. While competitors' investors are rewarding profits over growth, the streaming service’s stock rose 8 per cent after the market closed on Tuesday when it reported better-than-expected quarterly subscriber additions, opening new tab. The company is pumping hard to keep adding new eyeballs, but shareholders are setting themselves up for disappointment.

The group led by co-Chief Executives Ted Sarandos and Greg Peters said Netflix attracted 13 million additional subscribers during the fourth quarter, well past analysts’ forecast of 8.9 million, according to LSEG. In total, Netflix counts 260 million paid members globally.

New ad tiers are playing a part. To juice subscriptions, Netflix introduced in November 2022 a lower-priced option with commercials and forced those who were sharing other people’s accounts to pay up. Netflix doesn’t break out those tiers, and advertising is not yet material. But the benefits are reflected in its overall increase of new customers. While Netflix may be the clear winner in streaming because it can both increase its subscribers and generate a fourth-quarter operating margin of 17 per cent - more than double the margin in the fourth quarter of 2022 - the company noted it has to ramp up spending to keep up growth. Content amortization increased three times from 2016 to last year’s $14.2 billion. This year, the company forecast a high single digit percentage year-over-year increase in spending on TV shows and movies.

It is an acknowledgement that to keep people happy and attract new customers, the company has to broaden its content offerings. On Tuesday Netflix and TKO opened a new tab, the owner of WWE, announced a 10-year programming agreement to air live episodic wrestling matches of Raw and Smackdown for $5 billion. Annually it represented 7 per cent of Netflix’s free cash flow of $6.9 billion last year. Netflix is trading at nearly 30 times earnings for the next 12 months according to LSEG, approximately the same as Microsoft, opens a new tab and higher than Meta Platforms’ , opens new tab 20 times. At such lofty heights, Netflix won’t be able to catch its breath.

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Netflix reported on Jan. 23 that fourth quarter revenue rose 12.5 per cent year-over-year to $8.8 billion. The company added 13.1 million subscribers bringing total global subscribers to 260 million.
Netflix announced on the same day it struck a deal with TKO, the owner of WWE, to stream its flagship weekly program Raw starting in 2025. Netflix will pay $5 billion for the rights to air WWE’s TV shows including Smackdown over 10 years.