Netflix delivers solid 4th quarter, but stock sinks amid worries about slowing subscriber growth

Netflix Posts Strong Quarterly Earnings Amid Warner Bros. Acquisition Battle

Netflix ended 2023 with a robust financial performance, though slowing subscriber growth has raised questions about the streaming giant’s future trajectory and highlighted the strategic importance of its contested $72 billion bid to acquire Warner Bros.’ movie studio and HBO Max.

The company’s fourth-quarter results exceeded market expectations, with earnings reaching $2.4 billion, or 56 cents per share – a 29% increase from the same period last year. Revenue climbed 18% year-over-year to more than $12 billion, outpacing analyst forecasts.

Despite these positive figures, Netflix’s subscriber growth has decelerated notably. The streaming service now boasts over 325 million worldwide subscribers, adding approximately 23 million new users during 2023. This marks a significant slowdown compared to the 41 million subscribers gained in 2022, fueling investor concerns that Netflix’s growth may be reaching its ceiling despite the successful 2022 launch of its lower-priced, ad-supported tier.

The company’s outlook has further dampened investor sentiment. Netflix projected first-quarter profits below analyst expectations and announced it would halt share buybacks while pursuing the Warner Bros. acquisition. Additionally, the company forecasts its revenue growth will moderate from 16% in 2023 to between 12% and 14% this year, even as advertising revenue is expected to double.

“Overall, this points to a challenging start to the year,” noted Thomas Monteiro, an analyst at Investing.com. The somber forecast contributed to a nearly 5% drop in Netflix shares during after-hours trading, despite the better-than-expected quarterly results.

The financial report comes as Netflix finds itself locked in an intensifying bidding war for Warner Bros. Discovery. Earlier on Tuesday, Netflix revised its original offer to an all-cash deal, eliminating the stock component in an effort to simplify the transaction and make it more attractive to Warner Bros. Discovery shareholders who might be considering Paramount’s competing offer.

While Warner Bros. has reaffirmed its commitment to the Netflix deal, Paramount shows no signs of backing down and could potentially enhance its counteroffer, further complicating the acquisition process.

During Tuesday’s earnings call, Netflix co-CEO Ted Sarandos appeared to send a veiled message to Paramount, referencing the company’s history of successfully fending off competitors like Walmart and Blockbuster during its DVD-by-mail era. “We are no strangers to competition and we are no strangers to change,” Sarandos stated.

Beyond outmaneuvering Paramount, Netflix faces additional hurdles in securing regulatory approval. The company will need to convince U.S. antitrust authorities that adding HBO’s prestigious content library to the streaming market leader won’t harm competition or lead to price increases for consumers – a particular concern given the industry’s trend of rising subscription costs in recent years.

The acquisition uncertainty has weighed heavily on Netflix’s stock, which has declined by 20% since the Warner Bros. Discovery agreement was announced last month. This cloud of uncertainty is likely to persist, as Netflix doesn’t expect to complete the purchase until Warner Bros. Discovery finalizes the spin-off of its cable TV business – a process anticipated to take six to nine months.

Despite these challenges, Netflix leadership maintains an optimistic outlook. “We are energized as ever to achieve our mission to entertain the world,” Sarandos affirmed during the call.

The Warner Bros. acquisition represents a pivotal strategic move for Netflix as it seeks to bolster its content library and maintain its competitive edge in an increasingly crowded streaming landscape dominated by Disney+, Amazon Prime Video, and other major players vying for consumer attention and subscription dollars.