Netflix (NFLX) has solidified its reign as the unrivaled monarch of the streaming realm with its Q2 earnings triumph. The company’s ability to swell its subscriber base by adding 8 million net users in Q2 paints a picture of growth. Significantly, it is also broadening its operating margins, forecasting a rise to 26% in 2024, a step above the earlier prediction of 25%.
The market echoes its applause for Netflix’s extraordinary expansion, propelling shares to soar by 30% this year, a feat almost twice the meteoric ascent of the S&P 500 Index over the same timeframe. Now, all eyes are on the 2025 crystal ball for Netflix. Can the company sustain its growth cadence into the subsequent year? This article delves into the 2025 forecast starting with an overview of the Q2 earnings report.
NFLX Surpasses Q2 Estimates
Netflix’s Q2 revenues climbed nearly 17% year-over-year to $9.6 billion, slightly edging past the $9.53 billion that analysts had anticipated. The company’s earnings per share (EPS) clocked in at $4.88, a 48% YoY surge, outpacing the $4.74 projection from Wall Street.
By the quarter’s close, the company boasted 277.6 million subscribers, a figure comfortably surpassing the 274.4 million mark expected by analysts.
Netflix Defies the Bears
Netflix has upended the naysayers, surprising skeptics—including myself—with its stellar top-line and bottom-line displays, particularly at a juncture when competitors like Disney (DIS) are grappling to strike a balance between streaming profitability and growth. Netflix’s addition of 30 million net subscribers last year, followed by an eyepopping extra 17.5 million in the initial half of 2024, is a testament to its vigor.
The triumphant strides of the company’s ad-supported plan and its crackdown on password sharing far exceeded expectations. In its Q2 shareholder communique, Netflix revealed that ad-supported tiers accounted for over 45% of new subscribers in the respective markets. Management further disclosed a 34% sequential surge in the ad-supported member base during Q2, confirming 40 million active users for the plan. Netflix also announced the impending phase-out of the lowest-priced ad-free plan in the U.S. and France, currently valued at $11.99 per month in the U.S.
Netflix Stock Envisioned in 2025
Despite its formidable growth in recent years, Netflix still harbors untapped growth catalysts in its arsenal for 2025 and beyond. These include:
- Enhanced monetization of users on the ad-supported plan: While Netflix’s ad-supported plan generates revenue lower than that from ad-free plans, the accelerated growth has impeded effective inventory monetization. Though Netflix does not foresee ad revenues to steer significant revenue in 2025, it anticipates a transformation by 2026 and beyond. CFO Spencer Neumann even alluded to a potential shift where ad revenues could emerge as a primary contributor, leveraging on unparalleled engagement and reach.
- Live streaming venture: Netflix’s foray into live streaming, encompassing sporting events, holds promise as another growth propellant. In a notable move, the company sealed a $5 billion pact with World Wrestling Entertainment (WWE) in January and later clinched a 3-year agreement for the National Football League’s (NFL) Christmas Day matches.
- Gaming venture: Mapping the gaming industry as a $150 billion behemoth globally, Netflix may bask in this lucrative market, sans China and Russia. The potential for related ad revenues awaits exploration, positioning gaming as not only a value enhancement for users but also a prospective revenue wellspring.
- Pricing strategy refinement: By phasing out the basic tier, Netflix has bridged a substantial gap between the ad-supported plan priced at $6.99 per month in the U.S. and the ad-free plan commencing at $15.49 monthly. Potential subsequent price hikes for the ad-supported tier, coupled with fortified ad monetization, could steer the company’s average revenue per user higher.
- Margin augmentation: Netflix is diligently pursuing margin expansion, aiming to outpace profit growth vis-a-vis topline expansion, a trajectory that bodes well for 2025 and beyond.
Is NFLX Stock Teetering on Overvaluation?
Despite harboring no doubts regarding Netflix’s value proposition in contrast to other streaming peers, its valuations hover on a knife-edge. Presently, Netflix’s shares sport a next twelve-month (NTM) price-to-earnings (PE) ratio of 33.4x, a figure on par with industry stalwarts like Apple (AAPL) and Microsoft (MSFT).
Netflix may have rightfully garnered the privilege to trade at elevated multiples, notwithstanding a limited margin expansion scope ahead. The company’s earnings trajectory will be pivotal in the forthcoming years, heavily influencing the price narrative, primarily contingent on the kind of bottom-line growth the streaming titan ushers into the arena.