Shares have been on a tear, reflecting strong fundamentals.
After its rapid ascent over most of the past decade thanks to its dominance in the burgeoning streaming landscape, Netflix (NFLX -3.92%) hit a bit of a rough batch. Slower revenue and subscriber growth caused the shares to tank 51% in 2022.
But investors have sat back, relaxed, and pressed fast-forward. Now this top streaming stock is up 91% since the start of 2023 (as of Feb. 2). Credit goes to remarkable momentum with the underlying business.
Should you buy Netflix shares now?
Strong Q4 results
Netflix blew past estimates in the fourth quarter of last year. The business added 13.1 million net new members, helping push revenue up 12.5% year over year to $8.8 billion. This was the most customers Netflix was able to sign up in a fourth quarter ever. And it means the subscriber base expanded by an impressive 29.5 million in 2023, returning to Netflix's typical rate of roughly 25 million to 30 million additions per year.
Management called out success in the company's efforts to crack down on password sharing as a driver of the strong growth. And Netflix is benefiting from huge demand for the cheaper ad-supported subscription tier. Membership was up 70% on a sequential basis.
Even in the more mature U.S. and Canada markets, Netflix's customer base grew. The business raised its prices once again in the important U.S. market late last year, which helped propel a 3% gain in average revenue per user. The fact that Netflix's churn rate, at 2% in December, is consistently well below that of its peers indicates that customers still find huge value in the service. This means there could be untapped pricing power going forward.
Winning the streaming wars
Taking our attention away from the latest quarter and zooming out a bit, it's not hard to understand just how dominant Netflix has become. It appears to be winning the streaming wars by a wide margin right now.
By having a first-mover's advantage in the industry, Netflix was able to scale up rapidly during the 2010s when competition was limited. Now with 260.3 million subscribers and annual revenue of $33.7 billion, the business has the ability to spend a planned $17 billion on content this year, which is likely more than any other rival.
At the same time, Netflix is able to generate impressive profitability. Executives raised the outlook in 2024, and are now expecting an operating margin of 24% for the full year. This figure would be a massive increase from 13% in 2019.
One of Netflix's most formidable opponents, Walt Disney, reported an operating loss of $420 million in its direct-to-consumer operations, which includes Disney+, in the 2023 fiscal fourth quarter. It continues to be an uphill battle to get to positive profits.
The deciding factor
Because the shares have been going parabolic for nearly two years, they are trading at a richer valuation. The current price-to-earnings ratio sits at 47. On a forward basis, it's at 33.1 thanks to the earnings base, which is quickly rising. Nonetheless, some investors might be hesitant to get in at these levels.
Yes, the valuation is far more expensive than it was about 21 or so months ago. But the company is also firing on all cylinders right now. It's the leader in the industry, it still has huge growth potential, and it is seeing profitability expand.
Investors who have a long-term mindset should consider starting a position in Netflix today. Should the business continue its pace of double-digit earnings gains over the next few years, the stock has a shot at outperforming the overall market.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.
