Netflix (NASDAQ:NFLX), a standout among the FAANG stocks, was a key beneficiary of the post-COVID bull market, delivering exceptional returns. Over the past year, the stock has nearly doubled, driven by robust earnings growth. Following its latest quarterly results, investor confidence was evident, with the stock surging more than 14% in after-hours tradinga testament to the market's optimistic outlook. Netflix's strategic expansion into emerging areas such as gaming and live-streaming sports is helping the company build a comprehensive digital content ecosystem. Additionally, management's focus on tailoring subscription plans, particularly the ad-supported tier, has proven to be a significant success, further enhancing the platform's appeal and revenue potential.
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Success of the Ad-Supported TierNetflix's subscription strategies have been exceptionally well-executed, with the ad-supported plan standing out as a game-changer. This plan is pivotal in drawing more subscribers into Netflix's ecosystem. The company has made significant progress in developing its proprietary ad-tech stack, which underpins the success of this offering. Key features such as multiple buying options and direct ad purchases provide advertisers with greater flexibility. Additionally, by reducing reliance on third-party partners like Microsoft (NASDAQ:MSFT), Netflix has gained more control over its advertising operations while cutting costs by eliminating revenue-sharing agreements.
[Nielsen Gauge]
In Q4, Netflix reported that the ad-supported plan accounted for over 55% of sign-ups in the markets where it was available, with membership in this tier growing nearly 30% QoQ. According to Nielsen's Gauge report, Netflix's share of U.S. viewership rose from 7.6% in May 2024 to 8.5% in December 2024. While this data is U.S.-specific, I believe a similar trend could be observed in Europe and Asia-Pacific. With increased viewer share, advertising budgets are likely to shift towards Netflix, driving further revenue growth. Price hikes on the ad-supported plans also enhance profitability, and I don't anticipate a significant number of cancellations due to the added value of offerings like the extra member feature included in the ads tier.
Live Sports StreamingNetflix's expansion into live sports streaming is capturing a broad audience base and driving subscriber growth. Major events like the Logan Paul vs. Mike Tyson fight and NFL games have become some of the platform's most streamed events ever. Netflix has further solidified its position in this space by securing U.S. broadcasting rights for FIFA's Women's World Cup in 2027 and 2031, a significant move in diversifying its content portfolio. Given the success of these initiatives, I wouldn't be surprised to see Netflix pursue additional sports deals, such as acquiring UFC streaming rights when its current deal expires in 2025. If Netflix secures these rights at an estimated $900 million annually and attracts even 6% of UFC's 300 million fans, this could translate to 18 million new subscribers. At an average revenue of $135 per year per subscriber (based on Q4 2024 metrics), this would generate over $2.4 billion in revenue, adding nearly $1 billion in profits annually with a 5% buying conversion rate.
Adding Value Through Diverse OfferingsNetflix's ability to bundle a wide variety of content, from live sports to ad-supported tiers, is instrumental in justifying higher subscription prices. As Netflix continues to expand its live-streaming portfolio, including potential deals with WWE, NFL, UFC, and others, consumers are likely to perceive the price increases as worthwhile, given the enhanced value proposition. This diversification strategy not only strengthens subscriber retention but also paves the way for sustained growth in revenue and profitability.
Exceptional Q4 2024 PerformanceNetflix's last quarterly report of 2024, released on January 21, 2025, was nothing short of remarkable. The company delivered beats across all key metrics, exceeding even the most optimistic expectations. Revenue for Q4 2024 came in at $10.25 billion, representing a 16% YoY increase, while average paid memberships grew 15% YoY. Subscriber additions reached 18.91 milliondouble the street's estimate of 9.6 millionmaking it the largest quarter for net adds in Netflix's history. The growth wasn't just confined to the top line; operating income surged 50% YoY, while EPS doubled YoY. Netflix's operating margin improved significantly from 17% in 2023 to 22% in 2024. These results were supported by successful initiatives such as the Jake Paul vs. Mike Tyson fight, the return of Squid Game for its second season, and live-streamed sports events like the NFL. These catalysts proved effective in reversing the trend of declining net subscriber additions in previous quarters.
[Yahoo Finance]
Netflix's monetization strategy, particularly its ad-supported subscription tier, has been highly effective. This plan has enabled the company to offer lower price points, attracting a broader subscriber base. The ad-supported plan accounted for over 55% of sign-ups in markets where it was available, with membership in this tier growing nearly 30% QoQ. This momentum demonstrates the strong appeal of the ads plan and its contribution to revenue growth.
Cautious Guidance for Q1 2025Despite the stellar Q4 performance, Netflix's guidance for Q1 2025 was notably conservative. Management projected revenue of $10.42 billion, below the street estimate of $10.48 billion. Similarly, guidance for diluted EPS ($5.58) and operating income ($2.94 billion) fell short of expectations. Operating margin guidance of 28.2% was also slightly lower than the street's estimate of 29.8%. However, I am not overly concerned about these conservative projections. Netflix has a strong track record of outperforming EPS estimates, as demonstrated in 2024, where it consistently beat estimates by $0.74, $0.12, $0.27, and $0.06 in Q1, Q2, Q3, and Q4, respectively. Additionally, much of the subdued guidance can be attributed to foreign exchange headwinds, which tend to be temporary. Importantly, the guidance still reflects YoY growth, with revenue expected to grow 11.2% (14% on a currency-neutral basis). Operating margins are also set to improve slightly from 28.1% in Q1 2024 to 28.2% in Q1 2025.
Strong Cash Flow and Share BuybacksNetflix's financial position remains robust, with operating cash flow of $1.5 billion and free cash flow of $1.4 billion in Q4 2024. The company ended the year with over $9 billion in cash and equivalents, while net debt stood at $8.5 billion. This financial strength enabled Netflix to repurchase 9.9 million shares in 2024 for $6.2 billion, and I expect this buyback program to continue and even expand in the coming years. Notably, Netflix has announced a $15 billion buyback plan for 2025more than double any previous annual buyback. Assuming an average repurchase price of $1,050 per share, the company could buy back nearly 14.7 million shares, a 50% increase over 2024 levels. This signals growing confidence from management in Netflix's future prospects, supported by its diverse streaming offerings, including live sports, movies, and web series. Furthermore, the buyback program will boost future EPS and reward long-term shareholders, enhancing the stock's appeal.
Netflix's Competitive EdgeNetflix's dominance in the streaming industry becomes evident when compared to Amazon (NASDAQ:AMZN) Prime Video and Disney+. It boasts the lowest churn rate at just 2.17%, outperforming Amazon Prime Video's 3.7% and Disney+'s ~21%, which highlights its strong customer loyalty and satisfaction. The company leads the global market in subscriber numbers, cementing its position as the most popular streaming platformfurther solidified by its record-breaking Q4 2024 subscriber growth. While competitors like Disney have scaled back investments, such as announcing a $4.5 billion cut in content spending, Netflix continues to strike the right balance between content quality and return on investment. Its ability to raise prices without significantly increasing cancellations underscores its pricing power, with recent increases bringing the premium plan to $24.99, the standard plan to $17.99, and the ad-supported plan to $7.99. This pricing flexibility, combined with its vast subscriber base, supports Netflix's market leadership and sustainable growth in an increasingly competitive landscape.
Valuation: A Justified PremiumNetflix's stock has surged by 97% over the past year, reflecting significant investor confidence, but its valuation metricssuch as a P/E ratio of 40x and EV/EBITDA of 32xraise questions about sustainability. I believe the premium is justified, supported by the company's strong fundamentals (as discussed above). Netflix's YoY revenue growth of 15.7% far outpaces that of its competitors, with Walt Disney (NYSE:DIS) growing at just 2.8% and Warner Brothers declining by -5.9%. Similarly, Netflix's YoY EBITDA growth of 47% significantly exceeds Disney's 17.7% and Warner Brothers' -0.6%. These metrics highlight Netflix's superior operational efficiency and ability to grow profitability.
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Using Netflix's historical average forward P/E ratio of 47x and consensus earnings estimates of 24.8, I derive a price target of approximately $1,175 per share. Valuing the company using its PEG ratiohistorically trading between 1.3x and 2.1x, with an average of 1.7xthe current PEG of 1.5x results in a target price of $1,118. Combining these, the average target price comes to $1,147, which offers a margin of safety of about 17% from current levels, further supporting a buy recommendation. With tailwinds such as rising subscription prices, ongoing stock buybacks boosting EPS, and success in live-streaming sports, Netflix could easily surpass current EPS estimates. Additionally, the high per-share price may prompt management to consider a stock split, making shares more accessible to retail investors and potentially driving further interest in the stock.
Final ThoughtsNetflix remains the leader in the streaming industry, boasting over 300 million subscribers across nearly 200 countries. Its robust brand recognition, powerful network effects, and vast content library form a formidable economic moat that competitors will find challenging to overcome. Netflix's solid financial position and strong cash flow empower it to invest in even better content, potentially widening its lead in the market.
The company's growth strategy is anchored on two key pillars: expanding its user base and leveraging a well-executed pricing strategy. This dual approach ensures consistent revenue growth over the long term. Netflix's efforts to diversify revenue streams, such as its ad-supported tier, upward price revisions, and entry into new segments like live-streaming and mobile gaming, are paving the way for sustained earnings growth. Investors should not be overly concerned about the stock's valuation, even after its remarkable 97% rise in the past year. This performance is underpinned by robust fundamentals, driven by strategic management decisions like live-streaming initiatives, the success of the ad-supported tier, and the creation of an ecosystem that attracts and retains consumers. The recently announced large buyback program is further evidence of management's confidence in the company's long-term growth potential. In my view, Netflix's proven strategies and continuous innovation position it as a compelling investment opportunity for the future.
This content was originally published on Gurufocus.com
