Netflix (NFLX -0.17%) has been one of the biggest surprises on the stock market in recent years after investors had written off the stock in 2022 following two straight quarters of subscriber losses.
However, since then, the company has revamped its business, and it’s delivered enormous returns, as the stock is up more than 400% since it bottomed out in 2022. Netflix has added an advertising tier, which has been eagerly embraced by both subscribers and advertisers. It cracked down on password sharing through its paid sharing program, giving account sharers the option of paying extra to add a new member to their account. And the company moved beyond its traditional content by experimenting with live sports and mobile games.
Netflix stock recently topped $1,000 per share for the first time in its history, and its fourth-quarter earnings report shows how these strategies have borne fruit for the leading streamer. In the fourth quarter, the company added a record 18.9 million subscribers, driving revenue above $10 billion for the first time in a quarter. Even better, Netflix said that it added at least 4 million subscribers in each of its four regions, showing its growth is broad-based and that its content strategy is paying off.
After the recent rally, Netflix stock isn’t cheap, trading at a price-to-earnings ratio of 51. So where will the company be in three years? Let’s see what the future might hold for Netflix.
Image source: Getty Images.
More live sports
Just as Netflix probably made a mistake by resisting advertising for so long, it seems to be arriving at a similar conclusion for live sports. Both strategies have been staples of television for generations because they work.
The company’s live sports programming was likely a major reason why subscriber growth soared in the fourth quarter. Management noted that the Jake Paul-Mike Tyson boxing match was the most streamed sporting event ever, and the two NFL games it showed on Christmas Day were the most streamed NFL games in history.
Looking ahead, the company secured the U.S. rights for the Women’s World Cup in 2027 and 2031, and investors should expect the company to lean into live sports programming. Management has said it’s aiming for “can’t miss, special event programming” rather than full regular seasons, but sports has the ability to transcend borders in a way few other forms of entertainment can.
Honing the ad machine
Netflix hasn’t reported subscribers for its ad tier, but the advertising business seems to be entering a new stage. The company said that it was on to reach “sufficient scale for ads members in all of our ads countries in 2025,” and it aims to improve its ad product to ramp up its ad revenue.
Netflix launched an ad tech platform in Canada and aims to do the same in the U.S. and its other ads countries.
Because it’s a video platform with the ability to target ads, Netflix is an ideal advertising partner for brands, as it gives them the ability to show much more engaging ads than they would on Alphabet‘s Google or Meta Platforms‘ Facebook, the leading digital ad platforms.
By improving its ad targeting, Netflix has the ability to significantly improve its advertising revenue, especially as it adds new subscribers to the ad tier.
What the numbers will look like
Investors are anticipating solid growth in the business based on the current valuation, and after adding 41 million subscribers in 2024, it seems reasonable for the company to add 30 million a year for the next three years. That would bring its subscriber base to 390 million.
If average revenue per member (ARM) increases by 10% based on price increases and revenue growth, together, that would lift the company’s revenue by 43% over the next three years to $56 billion from $39 billion last year. Meanwhile, as the business ramps up, profitability should improve as well. It’s targeting a 29% operating margin for 2025, and 31% by 2027 seems reasonable.
That would give the company an operating profit of $17.4 billion, or double from last year. Earnings per share should grow even faster as it gains leverage on its interest expense and benefits from share buybacks.
If Netflix can deliver on that target, the stock is a good bet to continue outperforming over the next three years.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Meta Platforms and Netflix. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Netflix. The Motley Fool has a disclosure policy.
