An experiment to flush out freeloaders might just pay off for Netflix. The streaming group added 13.1 million subscribers in the three months to the end of December, its largest fourth-quarter subscriber growth on record, easily beating a consensus forecast of 8.97 million.
Netflix is maturing in an increasingly competitive market. That has forced the Santa Clara-based group, which started out as a DVD rental postal service in 1997, to search for more diverse ways to cash in on its content. Price increases are a blunt instrument, particularly when many household budgets remain squeezed.
Instead, it has decided to launch a cheaper plan with advertising and is cracking down on password-sharing between households. The with-ads subscription tier accounted for 40 per cent of new sign-ups during the final three months of last year, while the volume of accounts was up 70 per cent on the September quarter. With-ads plans have been launched in 12 countries accounting for about 80 per cent of global advertising spending. Cash generated through selling ads is not expected to be a material contributor to growth this year. Paid sharing on existing accounts is now business as usual.
Both of these efforts to better monetise its vast catalogue of films and television shows have benefited the top line. Revenue was 12.5 per cent higher year-on-year, more than five times the rate of growth recorded during the final quarter of 2022.
The numbers may allay fears that ad-free accounts could cannibalise higher-revenue-generating, standard subscriptions. Indications that the gamble might pay off sent the shares up by just over a tenth on results day. An enterprise value of just over 25 times forward earnings before interest, taxes and other items leaves the company as highly valued as it has been since the start of 2022.
Subscriber growth will not come so easily during this first quarter. Seasonality plays a part, but stricter controls on account-sharing will have also pulled forward some demand. Analysts have forecast net new subscribers of 4.1 million for the March quarter, albeit still far ahead of the 1.8 million added over the same period last year. For the fourth quarter this year, 6.2 million new subscribers are forecast.
There is also an element of weak comparatives as Netflix laps sluggish subscriber growth at the back end of 2022, when it grappled with a wider economic slowdown and the heavy comedown from a rush of new accounts during the pandemic.
Netflix has been rewarded for a keener focus on the bottom line. After heavy spending over the past decade to build up its back catalogue, margins have started to inflate. The Hollywood writers’ strike also held back spending last year. Net profit growth to $938 million, from $55 million, rapidly outpaced the rise in revenue.
Greater scale helped to push the operating margin for the year from 18 per cent to 21 per cent, ahead of the group’s target of 20 per cent. Content spending is expected to be $17 billion this year, which would be roughly level with 2022.
A weakening in the dollar against a basket of other currencies should prove to be another fillip to the margin. Forecasts for this year have been raised to 24 per cent, from between 22 per cent and 23 per cent.
Netflix is finally regaining ground against rivals. Its share of global demand grew quarter-on-quarter for the first time since before the pandemic, increasing from 33.3 per cent to 33.4 per cent. That is still down from just over 50 per cent in 2020, though.
The question is whether Netflix can hold the balance between spending on content and recapturing a greater share of the global streaming market. Nevertheless, the market’s growing confidence looks to be more firmly grounded than it has done for some time.
Advice: Hold
Why: The streaming group is doing a better job at improving its margin
Wizz Air
Investing in airlines is not for those of a weak constitution or those prone to travel sickness. Putting your money in a carrier is as safe as, well, a Boeing 737 Max door in-flight or a Pratt & Whitney engine.
Taking a position in an operator whose home market is eastern Europe and expanding into the Middle East puts you geopolitically, for want of a better phrase, directly in the line of fire.
Wizz Air, Hungarian by heritage, listed by stock exchange in London and rated at £2 billion in value, is the third of Europe’s great short-haul airlines behind Ryanair and easyJet. By business model, it is much more like the former, low-cost at any cost.
That is not to say that Wizz investors have not had their moments. In the three years before the arrival of Covid-19, Wizz shares had soared by 150 per cent before collapsing.
In the year after that, the shares more than doubled before spending the next 18 months losing more than 70 per cent of their value. In both instances, the stock price appreciation was more about the travelling than the arriving, a triumph of hope over experience. When reality kicks in, this is the toughest of industries.
At Wizz’s recent third-quarter results to the end of December, even Jozsef Varadi, the chief executive (and founder), admitted that his numbers were difficult to read.
A chunk of his 200-strong fleet is grounded for Pratt & Whitney engine safety checks, even if Pratt is compensating it; and there are wars to the east and the southeast, the markets into which Wizz had expanded. Aircraft can be redeployed, but at what loss to yields in struggling regional economies?
Wizz is a well-run airline and it deserves success for disrupting the status quo in European aviation. None of the above, though, make it immediately investable.
Advice: Avoid
Why: Wars, engine problems and slow economies are causing uncertainty
