• 4Q23 results were in line with our estimates. FY23 revenue/PATMI were at 98%/100% of our FY23e forecast. Paid memberships grew 13% YoY – its highest growth rate in 3 years, with 13.1mn net paid additions the largest 4Q ever.
• Growth drivers for FY24e are: 1) lower-priced ad-tier supporting 8% YoY subscriber growth; 2) ~20% price increase in developed markets. NFLX also raised FY24e operating margin guidance to 24% vs 20.6% in FY23, and expect steady margin expansion from ads.
• We raise our FY24e PATMI by 6% on higher margins due to price increases and scaling of its ads business, while also forecasting 13%/18% YoY FY25e revenue/PATMI growth. We maintain ACCUMULATE with a raised DCF target price of US$570.00 (prev. US$455.00). NFLX remains our top choice for streaming entertainment given its pricing power, growing membership base, and huge advertising opportunity. Our WACC/growth rate assumptions remain the same at 12.2%/3%, respectively.

The Positives

+ Increasing subscriber momentum driving revenue growth. 4Q23 ended on a high, with 260mn paid memberships (13% YoY). Subscriber growth momentum increased for a 4^th straight quarter. NFLX also added 13.1mn paid memberships (vs. 8.9mn est.) in the quarter, the most in 4Q. We believe the outperformance was driven by NFLX capturing price-sensitive consumers with its lower-priced ad-tier. Moving into FY24e, we expect revenue growth to be supported by: 1) membership growth of 8% YoY; and 2) 3% YoY ARM growth due to a combination of price increases and scaling of its advertising business.

+ Ads business scaling well; laying the ground work for future margin expansion. NFLX continues to scale its ads business well, with 70+% QoQ growth in the last 3 quarters. It has 23mn users on its ads tier, with 40% of new paid memberships opting for the cheaper subscription. Scaling its ads business is important because advertising revenue remains a long-term margin expansion opportunity for the company. However, we only expect advertising to contribute more meaningfully to revenue as it reaches scale in FY25e.

+ Raising margin expectations for FY24e and beyond. NFLX raised its FY24e operating margin guidance by ~150bps from a range of 22-23% to 24%, indicating a sharp ~340bps increase vs 20.6% in FY23. This expectation reflects: 1) FX tailwinds vs FY23; and 2) better-than-expected 4Q23 subscriber additions combined with price increases flowing into FY24e. Moving beyond FY24e, NFLX also expects to steadily improve margins YoY through a combination of price increases and advertising revenue growth.

ARM (Average Revenue Per Membership): Streaming revenue divided by average number of streaming paid memberships during a given period.

The Negative

– Nil.