The streaming service has had a strong year with its stock price up more than 55% YTD. Does it have more room to run?
Netflix (NASDAQ:NFLX) continues to dominate in the streaming wars, as the company posted excellent third quarter earnings on Thursday after the market closed.
The streamer generated revenue of $9.83 billion in the third quarter, a 15% increase year over year. Analysts had targeted revenue of $9.77 billion.
Net income rose 41% to $2.36 billion, while earnings per share spiked 45% to $5.40 per share, besting consensus estimates of $5.12 per share.
The stock price had gained more than 10% in morning trading on Friday and is now up about 55% year-to-date. Investors were not only thrilled with the results, but with the outlook as well.
5 million new subscribers
Netflix’s crackdown on account sharing last year has proven to be successful, as the company keeps adding more subscribers. In the third quarter, Netflix added 5.1 paid net additions, thanks to several new series that became hits, including The Perfect Couple (65M views), Monsters: The Lyle and Erik Menendez Story (55M views), and Nobody Wants This (37M views), along with new seasons of popular shows like Emily in Paris (50M views) and Cobra Kai (37M views). Netflix also had several films that were hits, including The Union (112M views), Rebel Ridge (105M views), and Beverly Hills Cop: Axel F (87M views).
But don’t expect to see new subscriber numbers much longer, as the company has decided to stop posting them in 2025, as it would instead like the focus to be on profitability.
The company’s strategy of creating an ad tier two years ago and making it more affordable, compared to other premium subscription levels, has also been popular. In Q3, it accounted for more than 50% of new sign-ups where it is available, and membership grew 35% overall for this service.
“We’re on track to reach what we believe to be critical ad subscriber scale for advertisers in all of our ads countries in 2025, creating a strong base from which we can further increase our ad membership in 2026 and beyond,” co-CEOs Greg Peters and Ted Sarandos said in the shareholder letter. “We’re also pleased with the engagement on our ads plan with view hours per membership similar to engagement on our standard plan in our 12 ads countries.”
The 12 ad tier countries are the United States, Australia, Brazil, Canada, France, Germany, Italy, Japan, Mexico, South Korea, Spain, and United Kingdom.
The company increased prices this month in several EMEA countries, plus Japan. And on Friday it boosted rates for customers in Spain and Italy.
While no new price increases were announced in the U.S., some analysts surmised that there could be price hikes in 2025, based on the company’s strong engagement numbers.
Robust outlook
Another reason that the stock was soaring Friday was the better-than-expected outlook. Netflix targeted 15% revenue growth in Q4, with higher net new additions than Q3 due to normal seasonality and a strong content slate.
The Q4 slate includes new seasons of Squid Game and Outer Banks, as well as new shows from Ray Romano, No Good Deed, and Ted Danson, Man on the Inside. It also has the Jake Paul-Mike Tyson fight, and two Christmas Day NFL games.
In Q4, Netflix projects net income of $1.8 billion, up from $938 million in Q4 2023, and an operating margin of 22%, up from 17% a year ago. With the higher-than-anticipated revenue forecast for Q4, Netflix raised its operating margin forecast for the full year to 27%.
Not only were investors impressed with the results, so were analysts, as Netflix stock received some 20 price target upgrades on Thursday and Friday. Morgan Stanley, for example, raised the price target to $830 per share, which would be a 9% increase over the current price.
So far, Netflix has been one of the few companies that seems to have figured out streaming. It is also still reasonably valued for its growth prospects, trading at 30 times forward earnings. It remains a solid buy.
