Netflix’s Stock Soars but Faces Challenges Ahead

Netflix (NASDAQ:NFLX) stock has experienced impressive growth this year, climbing nearly 90% year-to-date and currently trading at about $920 per share. In contrast, Disney (NYSE:DIS) has only gained approximately 26% during the same timeframe. This surge can be attributed to Netflix’s crackdown on password sharing and its new advertising-supported streaming plan, which have successfully attracted subscribers. Over the first nine months of this year, the streaming service welcomed more than 22 million new users, raising its total subscriber count to around 283 million. The question now is: What can we expect for Netflix’s stock in 2025?

Potential Slowdown in Subscriber Growth

The significant subscriber growth Netflix saw in 2024 stemmed from its strategies to limit password sharing, compelling users to either pay for more sharing options or establish new accounts. These measures have reached more than 100 countries, aiding in subscription growth and maximizing revenue from existing customers. The introduction of an ad-supported tier has also attracted a considerable number of new subscribers, with over half in eligible regions choosing this option in the latest quarter. However, with these initiatives mostly implemented, Netflix might face limited opportunities for further significant subscriber growth in the near future. It is possible that demand has been drawn forward, leading to more muted growth projections for 2025. Furthermore, Netflix’s decision to discontinue reporting subscriber numbers starting in 2025 might suggest an expectation of plateauing growth.

Are Price Increases on the Horizon?

Recently, Netflix increased the prices of its Basic and Premium plans by $2 and $3 per month, respectively. Nonetheless, its most affordable ad-supported plan and full-HD Standard plan remain unchanged at $7 and $15.50 per month. The last price hike for the full-HD plan occurred in January 2022, marking nearly three years without change. This history indicates that additional price increases could be forthcoming in 2025 to address rising content costs. With customers now accustomed to Netflix’s recent modifications, including paid sharing, the company may be able to implement these price hikes with minimal customer resistance. Nonetheless, increasing competition, particularly from Disney’s bundled streaming services at $15 per month, may limit how much Netflix can raise prices.

Future of Profit Margins

Netflix’s profit margins have significantly improved, reaching about 30% in Q3 2024, a rise from roughly 22% a year prior. This progress is credited to increased revenue per user from both price increases and the ad-supported plans, alongside moderated content spending last year due to the writers’ strike. While margins might hold steady in 2025 with ongoing revenue growth, potential challenges loom. As Netflix explores live sports programming, such as NFL games and WWE wrestling, content costs are expected to rise. Increased competition could also lead to higher cancellation rates and slower subscriber growth, potentially impacting profit margins.

Navigating Market Volatility

Netflix stock has a history of volatility, recording returns of 11% in 2021, a sharp drop of -51% in 2022, and a rebound of 65% in 2023. Contrarily, the Trefis High Quality (HQ) Portfolio, comprised of 30 stocks, has exhibited significantly lower volatility and has outperformed the S&P 500 each year within the same timeframe. This raises the question: Is Netflix stock still appealing at these price levels?

Concerns Over Current Valuation

Currently priced at approximately $920 per share, Netflix trades at around 40 times expected earnings for 2025, which some may consider steep. For comparison, the stock was valued at about 20 times earnings in mid-2022. Despite Netflix’s recent strong performance, markets often exhibit short-term thinking, assuming that current subscriber growth and revenue will continue at rapid rates. However, it’s plausible that subscriber additions may stabilize as the benefits of the password-sharing crackdown and ad plan take effect. Our valuation places Netflix stock at about $613 per share, roughly 33% below the current market price.

[1] Returns as of 12/17/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market Beating Portfolios

See all Trefis Price Estimates

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