Netflix Surges Amid Strong Subscriber Growth and New Revenue Opportunities

The S&P 500 has gained 22% this year, exceeding its average annual return since its inception in 1957. This uptick underscores the ongoing bull market that initiated in October 2022, with the index consistently reaching new record highs.

Robust Subscriber Gains Propel Netflix Forward

Leading the market’s advances is the technology sector, with Netflix (NASDAQ: NFLX) showcasing remarkable performance—its shares are up 54% this year. The company’s recent quarterly results have beat Wall Street’s forecasts, raising questions about its potential in the long term.

For the third quarter of 2024, Netflix added nearly 5.1 million new subscribers, surpassing Wall Street’s prediction of 4.5 million. The total subscriber count now stands at 282.7 million, solidifying Netflix’s status as the world’s leading streaming service—far ahead of Disney+, which holds a distant 153.8 million subscribers.

Notably, Netflix’s advertising tier attracted half of all new subscribers during Q3. The ad-supported option, priced at $6.99 per month, appeals to users looking for budget-friendly alternatives to the Standard ($15.49 per month) and Premium ($22.99 per month) tiers. Launched in late 2022, this tier is still in its infancy and has increased its subscriber base by 35% in just three months.

As Netflix builds its ad inventory, it aims to capture a larger audience to entice advertisers. While the currently available tier shows promising growth, experts predict that ad revenue could double by 2025, starting from a small base in 2024. The company reported an impressive $9.8 billion in total revenue for Q3—a 15% increase from last year, though slightly lower than Q2’s 16.8% growth.

Live Programming Enhancing Viewer Engagement

Engagement is crucial for driving advertising revenue. Currently, subscribers dedicate about two hours each day to Netflix, a duration that could rise with the introduction of live programming. Earlier this year, Netflix secured a decade-long agreement with TKO Group, becoming the exclusive home for World Wrestling Entertainment (WWE) content. Starting January 2025, WWE Raw will stream live weekly on Netflix, accompanied by other shows like Smackdown and NXT outside the U.S. This partnership will significantly increase the amount of live programming available on the platform.

Additionally, Netflix plans to live stream the Mike Tyson vs. Jake Paul boxing match in November, as well as broadcast Christmas Day NFL games. Given the typical three-hour runtime of NFL games, this content will likely enhance viewer engagement and attract advertisers interested in sports audiences.

Image source: Netflix.

Valuation Perspective: Is Netflix Stock a Bargain?

Currently, Netflix stock is reaching all-time highs, reflecting a 63% increase this year. With trailing-12-month earnings per share at $17.67, the stock’s price-to-earnings (P/E) ratio sits at 43.2, a premium when compared to the Nasdaq-100’s P/E of 32.1.

While this might suggest the stock is pricey, projections for 2025 show expected earnings per share of $23.11, bringing the forward P/E to a more appealing 33. Consequently, Netflix could represent a good investment opportunity, especially for those willing to hold for a few years.

Looking ahead, Netflix accounts for less than 10% of the average time U.S. consumers spend watching television, while streaming as a whole captures roughly 40% of the market. Both figures appear to be on the rise, indicating potential for future growth. Notably, Netflix’s leadership believes there is over $600 billion in total financial opportunity across subscriptions, advertising, and gaming, with only about 7% of that potential currently realized.

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*Stock Advisor returns as of October 21, 2024

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends TKO Group Holdings. The Motley Fool has a disclosure policy.

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