Netflix(NASDAQ: NFLX) hit another all-time high on Tuesday. Shares of the world's leading premium streaming service have soared 68% in 2024. The stock has nearly tripled since the start of last year.
Investors aren't complaining, obviously. However, it's not as if Netflix's subscriber base or revenue has soared 178% since the start of 2023. The shares may seem to be outrunning the fundamentals, but let's reset the starting line. The stock is up just 17% since the first time Netflix topped $700 three Novembers ago. The business has definitely improved by a lot more than 17% over the past 36 months.
The stock is rolling. Can it keep those reels turning in 2025? Let's take a closer look at what Netflix stock has to do to keep hitting new highs in the year ahead.
Financials worth binge viewing
Last month's strong financial update sent the shares soaring. Revenue rose 15% to $9.8 billion in the third quarter, fueled largely by a 14% increase in subscribers. Folks are also paying more for their subscriptions, particularly in its home market, as U.S. and Canadian users are paying an average of 5% more than they were a year ago.
The bottom line fared even better. Rising margins sent the operating margin and earnings per share soaring 52% and 45%, respectively. It was a sound beat on both ends of the income statement. Netflix was initially forecasting a 14% increase in revenue and a 33% jump in net income.
Netflix now expects revenue to grow at a 15% clip for the current quarter as well as for all of 2024. This follows back-to-back years of single-digit top-line gains, so the acceleration is relevant. It does see revenue slowing to between 11% and 13% in 2025, but that's just part of the story. Netflix sees its operating margin widening slightly in 2025, so profitability should continue to outpace its double-digit revenue growth spurt.
Image source: Getty Images.
Staying one step ahead
Netflix may not seem cheap. It's trading for 35 times next year's analyst profit target. But let's see how things will play out. You could've bought Netflix for just 12 times its latest 2025 earnings estimates at the start of last year, but at the time Wall Street pros figured the streaming leader would be earning a lot less.
A lot of interesting things are happening at Netflix. It's been two years since it announced a cheaper ad-supported plan. Initial results were encouraging. Cash-strapped viewers got a price break. Advertisers got a way to reach an audience they weren't able to reach before. It was a win-win-win initiative, with Netflix coming out of it with the widest grin.
Would people opt for ads to save a few bucks a month? It's happening in surprising sums. Amy Reinhard, head of advertising at Netflix, put out an encouraging press release this week. In countries where Netflix offers the ad-supported option, half of new sign-ups are going with the cheaper tier. An impressive 70 million of Netflix's 283 million paid memberships are now on ad-supported plans. It's a big jump for a format that was launched just two years ago.
A newer initiative is cracking down on password sharing. Netflix started doing that last year in select markets. If you have a friend or family member streaming your account away from your residence, Netflix is now asking for $8 more to add the remote viewer. Is it a coincidence that Netflix's business began to pick up -- and on stronger profitability -- since an ad-supported tier and a password-sharing crackdown was introduced?
One thing that will be different next year is that Netflix will no longer report quarterly subscriber numbers. Investors won't know the subscriber count or average revenue per membership. This isn't a red flag. The model is changing with new tiers and monetization strategies across 190 different countries. Judge Netflix on its revenue and earnings growth, just as you would with most investments.
Netflix isn't likely to triple in the next two years, but that doesn't mean it can't beat the market again in 2025. It's still the top dog of streaming services stocks. It has a near-stellar record of evolving and disrupting itself. You don't bet against companies like that.
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Rick Munarriz has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
