The Rising Prospect of Netflix Joining the $1 Trillion Club

Netflix is showcasing consistently strong growth and embracing new opportunities, which could propel this tech titan toward new heights.

In recent years, artificial intelligence (AI) has emerged as a significant driving force behind many successful companies. As AI technology has evolved, it has become an integral part of the strategies for major firms like Apple, Microsoft, Alphabet, Amazon, and Meta Platforms. These companies have leveraged AI to strengthen their products and services, allowing them to establish strong market positions. Similarly, Nvidia and Taiwan Semiconductor Manufacturing have developed the chips that empower AI advancements.

While Netflix has been a pioneer in leveraging AI for enhancing its streaming services and recommendations, it has recently faced challenges due to shifting investor focuses. Nonetheless, Netflix recently reported another quarter of impressive growth. With a current market cap of around $324 billion, speculating on its potential to enter the trillion-dollar club might seem early. However, the stock has seen gains of over 100% in the past year and an astonishing 1,380% over the last decade, suggesting that its growth trajectory is set to continue.

Strong Financial Performance

In its latest quarterly report, Netflix exceeded expectations across all key performance measures. The company achieved a revenue of $9.83 billion, reflecting a 15% increase year-over-year, while its earnings per share (EPS) reached $5.40, up 45%. This growth was supported by a surge in paid subscribers, which grew by over 5 million (14%). The company’s expanding operating margin also contributed significantly to its bottom line, increasing by an impressive 720 basis points to 29.6%.

To highlight the magnitude of this achievement, analysts had projected revenue of $9.77 billion, an EPS of $5.12, with subscriber additions estimated at 4.5 million. Therefore, Netflix has demonstrated strong performance against these predictions.

Management’s optimism regarding continued growth is evident, as they forecast fourth-quarter revenue of $10.1 billion, marking a nearly 15% rise, while expecting EPS to reach $4.23—more than double what was reported this quarter.

Growth Opportunities Ahead

On the conference call detailing their results, Netflix shared exciting plans to push its growth further through several key initiatives.

The company has been exploring video games, showing an increasing interest from audiences in titles based on Netflix’s rich library of intellectual properties. Most notably, they are anticipating success with a game based on the hit series Squid Game.

Additionally, Netflix is expanding its foray into live events. The streaming platform plans to live-stream a boxing match featuring Mike Tyson and Jake Paul. It also secured exclusive rights to air two NFL games on Christmas Day, involving teams like the Kansas City Chiefs and Baltimore Ravens. Furthermore, starting January 2025, Netflix will host weekly episodes of WWE Raw, another highly popular entertainment program.

However, perhaps the most significant growth driver lies in Netflix’s budding digital advertising business. During the call, management noted that the company’s audience and ad inventory are increasing rapidly, surpassing its ability to monetize effectively. The lowest-priced ad tier has seen a 35% quarter-over-quarter increase, comprising 50% of new memberships in countries where advertising is offered.

To boost its advertising sector, Netflix is launching a first-party ad server starting in Canada this quarter and extending this initiative to other markets in 2025. Furthermore, the company is leveraging its relationship with The Trade Desk to broaden its advertising reach. Notably, viewing patterns for ad-tier members mirror those of regular subscribers, indicating consistent engagement. Management expects ad revenue to double (from a small base) in 2025?

These initiatives clearly demonstrate a strategic approach to sustaining and enhancing Netflix’s growth trajectory.

Path to $1 Trillion Valuation

Currently valued at approximately $323 billion, Netflix would require a 207% increase in its stock price to reach the coveted $1 trillion market cap. However, there appears to be a viable strategy for growth in the coming years. Analysts forecast revenue for Netflix to reach around $38.74 billion in 2024, which would position the company with a price-to-sales (P/S) ratio of about 8. If Netflix maintains this valuation, it would need to achieve annual revenues nearing $357 billion to support a $1 trillion market cap.

Wall Street anticipates that Netflix will achieve an annual revenue growth rate of approximately 26% over the next five years. Meeting this benchmark could potentially allow Netflix to attain a $1 trillion market cap by 2035. Notably, the company has experienced a remarkable 562% revenue growth and a 1,450% increase in net income over the past decade, which suggests that Wall Street's projections may be conservative. Furthermore, given Netflix’s history of outperforming expectations, it might expedite reaching this goal.

Lastly, Netflix's current valuation stands at about 39 times its earnings, which may seem high at first glance. However, analysts predict that Netflix will generate an EPS of $23.11 by 2025, bringing its price-to-earnings (P/E) ratio down to 30, which is in line with the broader S&P 500 index. Considering Netflix’s strong growth trajectory and its substantial opportunities, this pricing could be justified for a company poised to maintain double-digit growth for years to come.

growth, opportunities, Netflix