Netflix Surpasses Growth Expectations, Aiming for $1 Trillion Market Cap

Artificial intelligence (AI) continues to influence major businesses, with several giants like Apple, Microsoft, Alphabet, Amazon, and Meta Platforms investing heavily to integrate this technology. Nvidia and Taiwan Semiconductor Manufacturing are key players in creating the chips that support AI endeavors. However, Netflix (NASDAQ: NFLX) has emerged as an AI pioneer in the streaming industry. Even amidst changing trends, the company recently announced impressive growth figures, showcasing its resilience and potential for future expansion.

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Remarkable Financial Performance

Netflix recently shared third-quarter results that exceeded analysts’ expectations in every key area. The company’s revenue reached $9.83 billion, reflecting a 15% increase compared to the previous year. Earnings per share (EPS) rose significantly to $5.40, marking a 45% jump. The company’s subscriber base expanded by more than 5 million, a growth of 14%. This success was reflected in an operating margin that expanded by an impressive 720 basis points, reaching 29.6%.

In comparison, analysts predicted revenue of $9.77 billion and an EPS of $5.12, with expected subscriber growth of 4.5 million. Netflix successfully exceeded these projections.

Strategies for Continued Growth

During the earnings conference call, Netflix outlined several strategies to sustain its growth momentum. One noteworthy initiative involves expanding into video games, where heightened interest is driven by the company’s growing catalog of characters and stories. In particular, excitement surrounds the upcoming game based on the popular series Squid Game.

Additionally, Netflix plans to capitalize on its recent ventures into live events. The company is set to live-stream a boxing match featuring Mike Tyson and Jake Paul on Nov. 15. Moreover, it holds exclusive rights to broadcast two NFL games on Christmas Day, involving the Super Bowl LVII champion Kansas City Chiefs and the Pittsburgh Steelers, as well as the Baltimore Ravens vs. the Houston Texans. Furthermore, starting January 2025, Netflix will air weekly episodes of WWE Raw.

Among these initiatives, boosting its digital advertising business stands out as Netflix’s most significant opportunity. The company reported that new users opting for the ad-supported price tier increased by 35% from the previous quarter and accounted for half of new subscribers in advertising regions.

Aiming for a $1 Trillion Valuation

With a current market cap of $323 billion, Netflix would need approximately 207% stock price growth to reach a $1 trillion valuation. Wall Street has high expectations, forecasting revenue of $38.74 billion for 2024. If Netflix maintains its forward price-to-sales (P/S) ratio of around 8, that would imply a need to grow revenue to about $357 billion annually to support a trillion-dollar market cap.

Analysts predict Netflix will grow its revenue by approximately 26% annually over the next five years. If achieved, this growth trajectory could lead to a market cap of $1 trillion as early as 2035. Considering Netflix’s past performance, where revenue increased by 562% in the last decade and net income soared by 1,450%, such growth might not be overly ambitious. Additionally, with its record of exceeding expectations, Netflix could expedite this growth timeline.

Currently, Netflix’s stock trades at about 39 times its earnings, which may initially seem steep. However, projections indicate that by 2025, EPS could reach around $23.11, resulting in a multiple of 30, aligning with the broader S&P 500 average. Given Netflix’s solid growth potential, this valuation appears justified.

Seizing a Promising Investment Opportunity

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*Stock Advisor returns as of October 14, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is also a board member. Randi Zuckerberg, a former Facebook executive, is also a board member. Danny Vena has investments in multiple technology companies, including Netflix. The Motley Fool also invests in various technology firms and recommends them. The Motley Fool has a detailed disclosure policy.

The views expressed here are those of the author and do not necessarily reflect those of Nasdaq, Inc.