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Five Things We Don't Still Don't Know About Netflix After Its Blowout Q4 Earnings

Netflix shares have added more than $75 billion in value since their early June trough, but the streaming giant faces a series of tough challenges heading into a pivotal year for the sector.

Netflix  (NFLX) - Get Free Report shares ripped higher again Friday, extending the stock's astonishing six-month rebound to around 55%, after its posted better-than-expected subscriber gains that offset both a big earnings miss and the departure of founder Reed Hastings as co-CEO.

That said, while Netflix was able to defy Street forecasts by adding some 7.66 million paid subscribers over the three months ending in December, it also posted its slowest sales growth since going public in 2002 and saw its bottom line fall more than 90% from the same period last year to just 12 cents per share. 

Netflix shares were marked 6.5% higher in early Friday trading to change hands at $336.30 each, a move that extends the stock's six-month gain to around 55%.

Netflix, which no longer provides specific guidance on new subscriber additions, said it sees a "modest" increase in new additions, with earnings in the region of $2.82 per share and revenues of $8.17 billion.

Its financial projections, however, offer little clarity into a what could be a series of near and long-term issues that could challenge the streaming giant's extraordinary growth story. 

Below are five issues that remain significant investor concerns in the wake of last night's fourth quarter earnings:  

1. Advertising: 

Netflix launched its discounted ad-supported platform late last year, priced at less than half the cost of its basic streaming offering, with reports quickly surfacing that subscriber gains had failed to meet targets promised to corporate advertisers.

Netflix said it's "ridiculously early" to judge its success, but indications are that the product experience is solid and advertising take rates are improving. CFO Spencer Neumann even went as far as to say it could be as big as Hulu -- the market leader that's partly owned by Walt Disney  (DIS) - Get Free Report -- "over the next several years."

What isn't known, however, is how Netflix's planned crackdown on password sharing (more below) will trigger so-called 'trade downs' where customers dump the more expensive tiers and opt for the cheaper ad-based plan. 

If advertising spending continues to weaken -- and today's big job cuts unveiling from Google  (GOOGL) - Get Free Report is yet another bad omen of exactly that -- Netflix could potentially find itself with two declining revenue streams and an increasingly cyclical business model.

2. Passwords:

Netflix said password sharing, which involves an estimated 100 million households that aren't currently paying for the service, "undermines our long-term ability to invest in and improve". 

The group is planning to rollout a significant effort to eliminate password sharing this year with the aim of converting those users into paying customers - which may explain its robust forecast of $3 billion in free cash flow and its comfort in reviving share buybacks.

However, with vague details on how it will execute the crackdown, and its warning that subscriber growth will be "uneven" as a result, investors remain cautious as to the overall revenue impact. 

"Management notes that this will result in a very different quarterly paid net add pattern in 2023, with paid net adds likely to be greater in 2Q23 than 1Q23," said KeyBanc Capital Markets analyst Justin Patterson. "Based on learnings from Latin America, Netflix expects some cancels in each market initially, before seeing improved engagement."  

3. Competition: 

Disney, Netflix's main streaming rival, has shifted focus from subscriber growth to profitability follow last year's ouster of CEO Bob Chapek and the return of streaming pioneer Bob Iger. The group has vowed to boost content spending, however, and its broad slate of live and on-demand offers, from television to sports to legacy films, makes it a formidable opponent and, at $10.99 per month, remains priced at a discount to Netflix's ad-free platform at $15.99 per month. 

Paramount Global  (PARA) - Get Free Report, Warner Bros Discovery's  (WBD) - Get Free Report HBO and HBO Max and Comcast-owned  (CMCSA) - Get Free Report Peacock are also ramping-up content spending, leaving Netflix with few options but to carry on ploughing around $17 billion a year into new programing -- not all of it designed to fit in an ad-based structure -- in order to ensure subscriber retention.

"Beyond the (ad supported platform) introduction and streaming competition, Generation Z preference for short-form TikTok content versus traditional linear streaming content is another competitive element," said Benchmark analyst Matthew Harrigan. "Management indicated it has still not found a way to make live sports economic although it is experimenting with fitness."

4. Leadership:

Reed Hastings, the Netflix founder who spearheaded the group's transition from a tiny mail-and-return DVD service to one of the most valuable media companies in the world, has stepped-down as co-CEO and will transition to the role of executive chairman.

Hastings, 62, has been with group since 1997 and has served as the face of the group --and indeed the streaming entertainment sector -- since Netflix went public in 2002.

His co-CEO, Ted Sarandos, will remain in place, but will relinquish his role as chief content office -- replaced by Bela Bajaria -- and will be joined by current COO Greg Peters.

The pair's ability to work together will prove crucial, particularly given the fact that Peters -- whose expertise is both on the tech and advertising portions of the business -- was elevated while Sarandos has effectively lost a portion of his portfolio and receives no title bump. 

Investors need only to look to Salesforce  (CRM) - Get Free Report -- where co-CEO Bret Taylor resigned after only a year in the role -- to see how challenging twin leadership can be. 

"Ted and Greg have developed great trust and respect for each other through their collective successes and failures," Hastings said in a blogpost. "In addition, they can always be relied upon to put Netflix’s interests first. These qualities -- combined with their complementary skill sets, deep knowledge of entertainment and technology, and proven track record at Netflix -- create a unique opportunity to deliver faster growth and greater success long term with them as co-CEOs."

5. Net Neutrality

Video services comprise around 65% of all internet traffic, data from Sandvine's 2023 Global Internet Phenomena Report published earlier this week, with Netflix overtaking YouTube as the individual 'app' generating the most traffic. 

The so-called Big Six of Meta Platform's Facebook  (META) - Get Free Report, Amazon  (AMZN) - Get Free Report, Google, Apple  (AAPL) - Get Free Report and Netflix generate more than half of all internet data, but pay little or nothing in usage fees, triggering increased pressure on lawmakers and regulators to change net neutrality rules. 

Net Neutrality -- a concept that effectively means internet service providers must treat all traffic equally -- has allowed Netflix to "to piggy back for free on hundreds of billions of investment in data by leveraging net neutrality rules to avoid sharing in these costs", said Pivotal Research analyst Jeffrey Wlodarczak. 

"There has been increasing noise in Europe in particular regarding large users of bandwidth effectively sharing in the costs to upgrade speeds (and) any changes to these rules could have an adverse effect on Netflix operating margin."