Netflix Q4 Reaction: The Post-Hastings Era Begins

Netflix Q4
Cheyne Gateley/VIP+

A new era has begun at Netflix, and it’s not just because Reed Hastings is transitioning to a new role at the company.

Though Hastings’ shift to executive chairman is among a number of key leadership changes unveiled along with fourth-quarter results Thursday, what really makes this a milestone moment is the new understanding Wall Street has about Netflix’s financial picture.

After its public debut in May 2002, Netflix stock traded much like a high-growth tech stock, with subscriber growth as the main metric for success. As the company dominated the streaming entertainment landscape and expanded internationally, sky-high subscriber growth made Netflix the best-performing stock of the 2010s.

But fast-forward more than 20 years, Netflix is finally being analyzed by investors as the media stock it is, where profit, revenue and free cash flow are the key metrics. Long gone are the days in which investors would turn a blind eye to reckless spending and massive debt.

And Netflix wants it that way, too. The company said in October that it would no longer be providing subscriber growth guidance because it believes other metrics should be considered when analyzing its financial health.

Since the beginning of Netflix, the company has relied entirely on recurring subscription revenue. In all honesty, it wasn’t sustainable, and Hastings came to that realization much later than many hoped.

Nevertheless, the company reevaluated its strategy last year with the rollout of its ad-supported service in November. We learned Thursday Netflix’s Q4 was the start of a turnaround for the streaming company, as investors began reevaluating the financials.

Netflix said it expects 4% year-over-year revenue growth in Q1, but that’s likely a very conservative estimate. Not to mention, the company is expected to deliver sustainable free cash flow generation. The company projects $3 billion of free cash flow in 2023.

Much of the forward-looking topline growth is expected to come from the new ad-supported product, and it’s showing encouraging early signs. While the revenue boost hasn’t quite materialized yet, the subscription boost it got was rather shocking, in a good way. There were some serious concerns about cannibalization of Netflix’s premium offering, but management said it hadn’t seen very little switching of plans so far. Engagement is up, and Netflix said the unit economics were strong.

All good news so far. Another bull case for Netflix going forward could be the password-sharing crackdown to be implemented in the coming months. According to management, it’s likely not going to be a universally popular move, but in the long term, the hope is that it will boost subscribers as more people opt for subscriptions of their own. While that would be nice, there is a risk that the churn will be much more meaningful than expected, which would turn that bull case into a bear case for the stock.

Like VIP+ has previously outlined, there are still many more short-term hurdles for Netflix to jump over before enjoying the fruits of its labor. The economic slowdown being a major headwind not just for Netflix but the entire world this year.

So as encouraging as the early signs are, they’ve only just begun, and there is still so much work to be done in this new era for Netflix. And who knows? If new management can pull it off, maybe Netflix stock can reach those all-time highs once again.