Contemplating Purchasing Netflix atthe Moment, Given its Current Price Dip Under $1,000?
In the last decade, Netflix has blown away investors with a staggering 1,500% increase in its stock price. The streaming titan's impressive financial results have kept its upward trajectory going strong. As we speak, shares are trading at all-time highs, leaving some wondering if it's still a worthwhile investment below the $1,000 mark.
Global Dominance through First-Mover Advantage
Netflix now boasts an astounding 301.6 million customers across more than 190 countries after adding 18.9 million net-new subscribers in Q4 2024. This solid growth was observed in every region, emphasizing Netflix's position as a truly global media powerhouse.
Netflix's success can, in large part, be attributed to its first-mover advantage. When competitors were still focused on traditional cable networks in the 2010s, Netflix invested heavily in its content library, technology, and marketing, quickly gaining customers. Now, the company's substantial financial gains reflect this strategic foresight.
In 2024, Netflix posted an impressive 27% operating margin. Leveraging its primarily fixed-cost model, the company has seen significant margin improvement since 2019, when the figure was just 13%. Executives expect the margin to climb further to 29% in 2025.
New Revenue Stream through Ad-Supported Tier
Sometimes, management teams must sway from their original plans to fuel growth. This is exactly what Netflix's leadership did. After years of stating they were unlikely to introduce ads to the platform, they launched an ad-supported subscription tier in November 2022.
The move to adopt ads has proven to be highly successful. The ad-based option saw a 30% quarter-over-quarter increase in memberships in Q4. Furthermore, 55% of new sign-ups chose the ad-supported plan in the countries where it's available. It's apparent that consumers value the choice of a lower-priced alternative.
Netflix's foray into ads has led to rapid growth and revenue generation. Co-CEO Greg Peters revealed that ad revenue doubled year over year in 2024, surpassing the overall business growth pace. The expectation is for ad revenue to double again in 2025.
Future Growth Opportunities: Live Sports and International Expansion
Initially, Netflix shied away from live sports broadcast deals. But management has changed their stance, entering the live events space. Examples include hosting WWE events and securing NFL games on Christmas Day, as well as the FIFA Women's World Cup in 2027 and 2031. These agreements will increase ad revenue growth.
The Weight of High Expectations
While Netflix's historical success is undeniable, investors must consider the forward price-to-earnings (P/E) ratio of 39.6, which is 46% more expensive than the tech-heavy Nasdaq-100 index. Some may find the valuation reasonable, but given the current price, it might be prudent to wait for a potential pullback to buy shares at a better forward P/E multiple.
Enrichment Data:
- Strong Subscriber Growth: Netflix added 19 million new subscribers in Q4 FY24, surpassing estimates and anticipations. The growth was broad-based, with significant additions observed in APAC, LATAM, EMEA, and US/Canada.
- Ad-Supported Plan Success: Ad-supported memberships saw a 30% quarter-over-quarter increase in Q4, with 55% of new sign-ups selecting the ad-based plan in available markets.
- Content Strategy: Highly engaging original hits and live events, such as Squid Game S2 and NFL games on Christmas Day, contributed to Netflix's tremendous growth. The company has an ambitious content budget of $18 billion in 2025, with a packed lineup of hits like Squid Game S3, Stranger Things S5, and Wednesday S2, among others.
- Operational Efficiency and Margin Expansion: Netflx's operating profit increased from $800 million in 2017 to $10 billion in 2024, with potential for it to triple to $30 billion over the next decade. The company aims to maintain a 29% operating margin in FY25, driven by its highly scalable model.
- Financial Health and Cash Generation: Netflix achieved better-than-anticipated free cash flow in Q4 FY24, reaching $1.4 billion, surpassing the $1.2 billion forecast by Pivotal and $1.0 billion consensus. The company experienced a 45% year-over-year growth in EBITDA in Q4 FY24, with strong performance in subscriber additions.
- Strategic Pricing Adjustments: Netflix raised subscription prices across various plans, which is expected to improve viewer experiences and allow for further programming and content delivery investments.
In the context of Netflix's continued success, some investors might be considering whether to invest more money in the company, given its impressive financial performance and expanding revenue streams.
Furthermore, as Netflix continues to explore new opportunities, such as venturing into live sports broadcasting and expanding internationally, it remains to be seen if these strategies will provide even greater financial return on the investment.
