Netflix (NFLX) recently reported earnings for the fourth quarter of 2022, delivering three major takeaways for investors.
Most notably, the company’s co-founder and long-time CEO Reed Hastings will be stepping down. He will be replaced by COO Greg Peters, who will serve as co-CEO alongside Ted Sarandos, a role Hastings held since July 2020. Prior to that, he’d solely handled chief executive duties since 1998.
Hastings will step into the role of executive chairman, ending a wildly successful quarter of a century at Netflix’s helm. Alongside this change in leadership, there will also be a change in expectations.
Profitability > Growth
For years, Netflix and other streaming giants were judged based on a single metric: subscriber growth. However, as the industry has matured, investors have shifted their mentality. Now massive losses are no longer acceptable, even if subscriber growth is through the roof. Investors want to see profitability.
Fortunately for Netflix, this is one metric where it already stands ahead of the pack. In a tough period for the streaming industry at large, Netflix has remained profitable for several years now. In Q4 2022, it posted a net profit of $55 million and total revenue of $7.85 billion year-over-year. Although profits were underwhelming, Netflix posted almost 7.7 million new subscribers in the same quarter, well above the 4.5 million expected.
While the tone of the report leaned positive. Netflix’s streaming business is no longer in “startup mode.” Its main focus now isn’t growth, but exceeding expectations in free cash flow, and there are two ways it plans to do so.
Generating Cash Flow
Netflix’s path to profitability depends upon its ad-supported tier and its crackdown on password sharing.
Netflix estimates that nearly 100 million people watch shows or movies using someone else’s account. If just half of those people switched over to Netflix’s ad-supported tier, priced at $6.99 per month, it would instantly add an extra $350 million in monthly revenue and over $4 billion per year.
By limiting password sharing and promoting the cheaper subscription, Netflix hopes to continue its bounceback and remain at the forefront of the streaming industry, even as it enters a new era. For viewers, however, the new era may simply mean the glory days of using Netflix without paying for Netflix are nearing an end.
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