Here’s why Netflix is leading the pack with no signs of slowing down, and whether this growth stock is worth buying now.
The chart below illustrates the importance of Netflix’s sales and operating profit growth.
The stock tumbled in 2022 as Netflix’s profit margins fell and investors questioned the viability of its business model, joining a broader selloff in growth stocks. Since then, Netflix’s sales have returned to growth and operating margins have hit record highs.
At first glance, Netflix’s business model seems quite risky. The company spends billions of dollars a year producing content, hoping to attract viewers by increasing engagement on the platform and justifying future price increases. If Netflix loses audience interest due to weak content, or its customers simply switch to other streaming platforms, the company’s business could slow down significantly.
I think it’s important to realize that Netflix is not the same company it was a few years ago. It has learned from its past mistakes of focusing too much on quantity over quality. Netflix is still producing a lot of content, but it also has its fair share of flops. But it also has great success in different categories, making it stand out from the competition.
The best metric to use when measuring the value of Netflix is screen time. Screen time is more important than subscriber count as it determines engagement. In Netflix’s second quarter 2024 shareholder letter, the company cited a Nielsen report stating that streaming accounts for 40.3% of daily TV screen time in the United States, while cable accounts for 27.2%, broadcast accounts for 20.5%, and others account for 12% . Of total screen time per day, letterYouTube accounted for 9.9%, followed by Netflix at 8.4%, meaning the two services combined now account for 45% of U.S. TV streaming screen time.
In Netflix’s Season 3 shareholder letter, the company said that each paying member watched an average of two hours of screen time per day – an incredibly impressive number. The company sees its combination of licensed and original series and movies, as well as its new exposure to games and live events, as a compelling value package relative to other streaming services that have been forced to bundle and discount their offerings. to retain and attract users.
In every shareholder letter, Netflix discusses the ratings of popular shows and its upcoming content. Blockbuster programs such as squid game (Season 2), Outer Banks (Season 4), and love is blind (Season 7) will all air in its fourth season, Netflix reported on Tuesday. Therefore, investors should pay attention to how these shows perform and how they progress through 2025.
Netflix expects fourth-quarter revenue of $10.13 billion, which would be its highest quarterly revenue ever, with an annual increase of 14.7%. Operating margins are expected to decline to 21.6%, but that’s typical seasonality for Netflix’s fourth quarter, which tends to be the lowest margin quarter of the year. Compared with the fourth quarter of 2023, Netflix expects operating income to grow by 46.4% and operating profit margin to grow by 21.6%, an increase of 4.7 percentage points.
Again, the focus should be more on the performance of Netflix’s holiday season content and full-year 2025 expectations. Investors would like to see Netflix maintain revenue growth in the mid-teens and operating margins in the mid-to-high 20% range.
In 2023, Netflix phased out the Basic plan and implemented a Standard (with ads) package priced at $6.99 per month, Standard priced at $15.49 per month, and Premium priced at $19.99 per month. Since 2022, the standard version has remained at $15.49 per month, with the premium version increasing to $22.99 per month in 2024.
If I had to guess, I’d say we’re going to increase the price of the standard option in 2025, and probably also include the advertised standard option.
Investors should pay attention to management’s tone on the earnings call regarding possible price increases. During its third-quarter earnings call, Netflix discussed its long-term earnings cycle. It basically says that as long as it offers quality programming across a variety of categories and interests, it should be able to justify future price increases. This formula makes Netflix an elite streaming provider that can appeal to a variety of interests to keep families engaged.
Since Netflix has focused solely on substantial earnings growth (rather than just sales growth) over the past five years, the price-to-earnings ratio (P/E) is now arguably the best metric when considering Netflix’s valuation.
Netflix’s price-to-earnings ratio is 49 times, and its forward price-to-earnings ratio is 36 times. This makes Netflix much more expensive than other communications giants such as meta platformhas a forward price-to-earnings ratio of 24, and Alphabet has a forward price-to-earnings ratio of 22.
Netflix is definitely worth its premium valuation, but the question is, at what premium? If Netflix can continue to grow its market share in streaming, and streaming continues to take market share from cable and broadcast, then over time Netflix can grow to its valuation, which It’s a matter of course. But right now, the stock is far from cheap, and investors will have to pay a hefty price if they want a piece of the pie.
I believe that for those investors who can tolerate the risk, now is a good time to open an initial position in Netflix, while for most investors, just keep the company on a watch list. However, if the company implements price increases this year, its profit growth could accelerate.
Netflix has struggled in the past with content spending. It would have too many flops, and its click-through rate would be inconsistent. Today, Netflix is thriving in a variety of categories, from live events to dramas, comedies, historical films, and niche interests.
The stock is expensive, but it’s still worth buying if you believe in the long-term future of the business.
The upcoming earnings call is very important for the company. It will indicate whether fourth-quarter content is as compelling as Netflix suggests, and whether the company is confident it can successfully repeat in 2025.
As a company, Netflix has nothing to prove, but given its high valuation, it has a lot to prove as a stock.
Before buying Netflix stock, consider the following factors:
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Randi Zuckerberg is the former director of market development and spokesperson for Facebook, the sister of Meta Platforms CEO Mark Zuckerberg, and a board member of The Motley Fool. Suzanne Frey is a senior executive at Alphabet and a board member of The Motley Fool. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions and recommendations for Alphabet, Meta Platforms, and Netflix. The Motley Fool has a disclosure policy.
Netflix has a lot to prove on January 21st. Originally published by The Motley Fool
