Currently priced at just above $700 per share, Netflix (NFLX) stock has nearly doubled in the past year, but flatlined over the last 30 days. After the market closes on October 17, the streaming giant is set to release its Q3 2024 earnings for the three months ending September. Netflix has demonstrated strong financial performance recently, having surpassed analyst EPS estimates in the past two quarters.
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However, investors are likely questioning whether buying into NFLX stock at its current price is worth the risk. In my belief, it is worth the risk when we account for long-term trends and the company’s market positioning. Let’s break down the bullish view.
Netflix’s Market Positioning
Although it’s not the same has holding a utility company, investors likely draw confidence from Netflix’s reliable revenue stream from subscription fees. However, that reliability is heavily influenced by content quality, and there is always the chance that Netflix content fails to deliver in the future. Netflix needs to stay at the top of its game, given that it has to compete for the limited number of hours people spend on streaming content. Competing platforms include Amazon’s (AMZN) Prime Video, Disney’s (DIS) Disney+, Hulu, HBO Max, Youtube and others. Time vampires like Youtube and TikTok limit Netflix’s screen time pool, and accessing them is free.
As viewers have their attention divided across both traditional media and streaming services, there is a limited amount of available screen time that Netflix can tap into for growth. According to Nielsen’s The Gauge survey as of June, streaming services hold the bulk of people’s attention at 40.3%, followed by cable (27.2%) and broadcast (20.5%). Per Parrot Analytics report for Q2 2024, Netflix has gained the most ground in streaming with an on-platform demand share of 18.2% (up from 18.1% in Q4 ‘23), accounting for 277.6 million subscribers globally. That’s a good reason to stay bullish. For comparison, Amazon Prime Video has around 218 million users, having experienced a decline in market share from 13.1% in Q4 2023 to 11.4% recently.
The fact that Netflix abandoned free trials implies that the company counts on their established network effect. While many consumers subscribe to multiple streaming platforms for exclusive content, when that content loses its appeal, they tend to reduce discretionary spending and default back to Netflix as their go-to streaming service.
Reliably Capturing Users’ Attention
According to June’s Netflix culture memo, the company has captured a global audience of over 500 million. That kind of user base requires a diversified approach which is why Netflix pursues what they call “uncomfortably exciting” content that seeks to deliver a thrill.
Judging by the watch hours of many Netflix hits during H1 2024, from Baby Reindeer (347.6M) and The Gentlemen (507.3M) to Bridgerton (733.8M) and Fool Me Once (689.5M), I believe that Netflix is effective in catering to diverse tastes. In Q2, Bridgerton Season 3 was the most in-demand streaming original globally.
Netflix posted 17% top-line growth in Q2 2024 to revenues of $9.5 billion, while also increasing operating margin from 22% to 27% year-over-year. Netflix’s earnings per share increased by an impressive 48% year-over-year to $4.88.
Netflix Is Built for Growth
For the full fiscal year of 2024, Netflix’s internal forecasting projects 14% – 15% revenue growth, up from a previous estimate of 13% – 15%. The company is also projecting an operating margin increase from 25% to 26%. While these incremental advances may seem tiny, they evidence Netflix’s economies of scale.
After fixed costs related to content production, the marginal cost of streaming to more users is negligible. This core business model strength helps explain why NFLX stock is up 97% over one year. Netflix substantially increased its operating margin from 22.3% in Q2 2023 to 27.2% in Q2 2024, with an expectation of 28.1% for the upcoming Q3 earnings report. Netflix is also counting on ad monetization.
Building Ad Monetization Atop Subscription Revenues
After the 34% quarterly growth for ad-tier membership in Q2, Netflix is looking to launch an in-house ad platform. It will first be tested in Canada before the end of 2024 and then launched in 2025. I am not surprised by this initiative.
Given that Amazon Prime Video launched an ad-supported tier at the beginning of this year, Netflix is aiming to further lower the barrier to entry. If this tier becomes the default solution, Netflix will probably gain additional streaming market share, likely against the aggressive ad-saturated YouTube.
Taking into account that YouTube has no barrier to entry, users are primed to take the Netflix plunge if the company adopts a more sensible ad-injection approach. Moreover, after the crackdown on password sharing, it is likely that affected users will continue to opt for the ad-tier membership as their new default.
What Is the Wall Street Consensus on Netflix Stock?
For Q3, analysts expect Netflix will post $5.12 of EPS. This would represent a 5% increase from the prior quarter’s EPS of $4.88. The increase can be attributed to all the aforementioned growth drivers. Netflix generated a substantial $1.2 billion free cash flow in the last quarter, widening its runway for future projects that could drive additional revenue.
On TipRanks, NFLX stock is classified as a Moderate Buy, based on 25 Buy ratings, 10 Hold ratings, and two Sell ratings from Wall Street analysts. The average NFLX price target of $729.53 implies about 4% of potential upside from the recent market price.
With that said, investors should expect price volatility before and after the earnings report on Thursday as the period will be ripe with speculative trading.
Conclusion on NFLX Stock
Although Netflix’s forward 2025 price-to-earnings (P/E) ratio is above 30x, I believe the company’s core business model remains promising and investible. Netflix is still trying to capture audiences with diversified content, as opposed to settling for established streaming dominance,
Once produced, Netflix content serves as a long-term revenue generator. Likewise, whether 1 million users or 100 million users watch the content, Netflix economies of scale deliver tremendous value. Now that the company is pushing for ad monetization with its own technology, this should serve as another revenue layer going forward.
At the end of the day, the high price of NFLX stock may be daunting for investors, but by the end of 2025 today’s share price may very well look like a bargain. I’m bullish on NFLX stock.
