Consistently strong growth and emerging opportunities could elevate this tech giant to new levels.
The rise of artificial intelligence (AI) has been a major trend in recent years. Early last year, advancements in AI gained widespread attention, and numerous companies in the $1 trillion valuation range are at the forefront of this cutting-edge technology.
Apple, for example, integrates AI into products like Siri and Maps. Similarly, Microsoft, Alphabet, Amazon, and Meta Platforms have created formidable barriers to market entry by deeply embedding AI into their operations. Nvidia and Taiwan Semiconductor Manufacturing produce the essential chips for AI functionality.
Netflix is recognized as an early adopter of AI, utilizing advanced algorithms to shape its streaming recommendations and production decisions. Despite some focus shifting to other emerging technologies, Netflix has recently reported another quarter of significant growth. Currently maintaining a market capitalization of $324 billion, the suggestion that Netflix could join the trillion-dollar club may seem premature. Nevertheless, with a stock price increase of more than 100% over the past year and 1,380% over the past decade, the company’s upward trajectory is supported by solid evidence.
Netflix recently announced its third-quarter results, exceeding expectations across all key metrics. It reported revenue of $9.83 billion, a 15% increase year over year, contributing to a significant rise in profits as earnings per share (EPS) reached $5.40, a 45% increase. Growth in paid subscribers added over 5 million new members, a 14% rise, while an expanding operating margin increased by 720 basis points to 29.6%.
Analysts had anticipated revenue of $9.77 billion with an EPS of $5.12 and a subscriber growth of 4.5 million, yet Netflix surpassed all these forecasts. The company’s management is optimistic about continuing this growth trend, projecting fourth-quarter revenue of $10.1 billion, a near 15% increase, and an EPS of $4.23, which would more than double.
Discussing future strategies during a conference call about the results, Netflix identified three significant growth opportunities. The company has been exploring video games and is witnessing increased interest in games based on its intellectual property. Management expressed particular enthusiasm for a new game based on the most-watched series, Squid Game.
Additionally, Netflix is capitalizing on live events, planning to live-stream a boxing match between Mike Tyson and Jake Paul on November 15. The company holds exclusive rights to two NFL games on Christmas Day, featuring the Kansas City Chiefs against the Pittsburgh Steelers and the Baltimore Ravens against the Houston Texans. Furthermore, Netflix has secured WWE Raw, a top-rated wrestling show, beginning weekly episodes in January 2025.
Netflix sees its expanding digital advertising business as its most significant opportunity. The company’s audience and ad inventory are reportedly growing faster than its ability to monetize this growth. Subscribers to the lowest-priced ad-supported tier increased by 35% quarter over quarter, comprising 50% of new memberships in regions where Netflix offers advertising. Netflix plans to accelerate its advertising ventures, launching a first-party ad server in Canada this quarter and expanding it to other advertising markets by 2025. It is also leveraging a partnership with The Trade Desk to extend its advertising reach. Netflix reported that ad-tier users exhibit similar viewing habits as other subscribers, reflecting consistent engagement. The company anticipates advertising revenue to double from a small base by 2025.
Each of these initiatives represents a driver for incremental growth, demonstrating how Netflix intends to maintain its strong expansion.
With a market cap of $323 billion, Netflix would require stock price gains of around 207% to reach a $1 trillion valuation, but a path for growth in the upcoming decade is apparent. Analysts project Netflix to generate $38.74 billion in revenue in 2024, providing a forward price-to-sales (P/S) ratio close to 8. If this P/S remains stable, Netflix would need to increase its revenue to approximately $357 billion annually to support a $1 trillion market cap.
Predictions from Wall Street suggest Netflix will grow its revenue by about 26% annually over the next five years. Achieving this target could enable Netflix to reach a $1 trillion market cap by 2035. Over the past decade, Netflix has increased its annual revenue by 562% and its net income by 1,450%, suggesting a potentially conservative outlook from analysts. The company’s historical tendency to outperform Wall Street’s predictions may further accelerate this timeline.
Currently, Netflix trades at approximately 39 times its earnings, which may appear high at first, but Wall Street expects the company to generate EPS of $23.11 by 2025, implying a multiple of 30—comparable to the S&P 500. Considering Netflix’s consistent growth record and its significant potential, this valuation may be reasonable for a company expected to continue achieving double-digit growth over the next five years.
