Netflix stock surged over 14% in after-market hours following its earnings update. As someone who has rated Netflix stock as a buy for several years, I'm thrilled. For 2025, I still rate Netflix stock as a buy. But is it too late to invest? Let's review the company's latest quarterly results, incorporate the new higher valuation, and determine if Netflix stock is still a buy for long-term investors.
Earning Overview
In 2024, Netflix's revenue grew by 16%, and its operating margin expanded by six points to 27%, up from 21% the previous year. This is a phenomenal increase, making Netflix the best in class among streaming players. The fourth-quarter slate outperformed expectations, with "Squid Game" season 2 on track to become one of the most-watched original series ever, and the Jake Paul vs. Mike Tyson fight becoming the most-streamed sporting event ever. Additionally, the Christmas Day NFL games were the most-streamed in history.
Netflix's Q4 2024 earnings report was impressive, surpassing expectations on multiple fronts. Here are the key highlights:
Revenue and Earnings: Netflix reported revenue of $10.25 billion, a 16% year-over-year increase, and earnings per share (EPS) of $4.27. Both figures exceeded Wall Street estimates.
Subscriber Growth: The company added a record 19 million subscribers in the fourth quarter, bringing the total to 302 million paid memberships. This growth was driven by a strong content slate and improved product offerings.
Content Success: Notable releases included "Squid Game" season 2, the Jake Paul vs. Mike Tyson boxing match, and NFL games on Christmas Day, all of which contributed to the subscriber surge.
Future Outlook: Netflix raised its revenue forecast for 2025 to a range of $43.5 billion to $44.5 billion, reflecting improved business fundamentals. The company also announced a $15 billion boost to its share repurchase program.
Price Increases: Netflix plans to raise subscription prices in the U.S., Canada, Portugal, and Argentina, which has already been factored into their guidance
Netflix's massive reach and scale allow it to deliver events that benefit from large audiences, a significant advantage as people cancel their cable subscriptions in favor of more convenient streaming options. This shift is part of why I have consistently rated Netflix stock as a buy.
Fundamental Analysis
I'm pleased that Netflix isn't overly focused on games, instead emphasizing their strength in content, shows, and movies. Their entry into sports is promising, as their scale gives them an advantage over competitors like Disney's ESPN. With over 301 million streaming subscribers, Netflix's reach could approach 1 billion individuals, allowing them to spread the cost of sports programming across a broader base. This scale is crucial as the cost of sports content rights continues to rise, making it difficult for smaller studios to justify the expense.
By lowering the cost per subscriber to pay for sports, Netflix is well-positioned to capitalize on this opportunity. I appreciate their gradual approach, as they aren't rushing to buy entire season rights for major leagues like the NFL or NBA. Instead, they're testing the waters with specific events, such as the Christmas Day NFL games and the Mike Tyson vs. Jake Paul fight, to gauge customer response. This strategy allows them to make informed decisions on bidding for new sports rights, iterating and building this side of the business gradually.
This approach could attract millions more subscribers and encourage even more people to cancel their cable subscriptions in favor of streaming. Sports content is a significant reason why many people still have cable, but as sports move towards streaming, it unlocks a new layer of growth for streaming businesses.
Netflix recently reported a record quarter, adding almost 19 million subscribers, the most in its history. This growth is profitable, driven by the quality of their content rather than lower prices or incentives. Following the stock price increase, Netflix is trading at a forward price-to-earnings ratio of 32, which is high compared to the past year. However, the business today is much stronger, with 42 million more subscribers and a significant increase in operating margin.
Guidance
Looking ahead to 2025, Netflix's priorities include improving its core business with more series and films that members love, developing newer initiatives such as live programming and games, and sustaining healthy growth. They forecast $44 billion in revenue, $500 million more than their previous forecast, and an operating margin of 29%, up one point from prior forecasts.
Risk & Challenges
Netflix is poised for growth in 2025, but it will face several challenges:
Increased Competition: The streaming market is highly competitive, with major players like Disney+, Amazon Prime Video, and HBO Max continually expanding their content libraries and subscriber bases. This competition could pressure Netflix to invest more in content to maintain its market position.
Rising Content Costs: Producing high-quality content is expensive, and as Netflix continues to expand its offerings, especially in live sports and original programming, the costs could escalate. Balancing these expenses while maintaining profitability will be crucial.
Subscription Price Increases: Netflix has raised its subscription prices for 2025. While this can boost revenue, it also risks subscriber churn if customers perceive the value isn't worth the higher cost.
Password Sharing Crackdown: Netflix's efforts to crack down on password sharing could lead to some backlash from users who are accustomed to sharing accounts. This initiative aims to convert shared accounts into paying subscribers, but it could also result in some cancellations.
Network Infrastructure Costs: There is ongoing pressure from telecom operators for Netflix to contribute to the costs of network infrastructure, as streaming services consume significant bandwidt. Negotiating these costs will be important for maintaining smooth operations.
Regulatory and Market Risks: As Netflix expands globally, it must navigate various regulatory environments and market conditions, which can pose risks to its operations and growth strategies.
Despite these challenges, Netflix's strong content slate, strategic initiatives, and large subscriber base position it well to navigate and potentially overcome these obstacles.
Technical Analysis
Based on the latest technical analysis, here are the key support and resistance levels for Netflix (NFLX):
Support Levels:
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First Support Level: Around $920
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Second Support Level: Approximately $890
Resistance Levels:
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First Resistance Level: Near $980
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Second Resistance Level: Around $1,020
These levels are derived from various technical indicators, including moving averages and pivot points. It's important to monitor these levels as they can provide insights into potential price movements and help in making informed trading decisions.
Valuation
As of today, Netflix's stock is trading at approximately $953.99 per share. The company's market capitalization stands at around $407.79 billion. Netflix has a price-to-earnings (P/E) ratio of 53.98, reflecting investor expectations of continued growth and profitability.
Despite the recent surge in stock price, Netflix's valuation remains robust, driven by its strong subscriber growth, successful content slate, and strategic initiatives in live sports and other new areas. This positions Netflix well for future growth, although it will need to navigate challenges such as rising content costs and increased competition.
Market Sentiment
The market sentiment around Netflix is currently positive, driven by its strong Q4 2024 earnings report and record subscriber growth. Here are some key points:
Investor Optimism: Netflix's better-than-expected financial results have boosted investor confidence, contributing to a surge in its stock price. Analysts are optimistic about the company's future, particularly with its strategic moves into live sports and continued content success.
Fear & Greed Index: The CNN Money Fear & Greed Index, which measures market sentiment, shows improvement but remains in the "Fear" zone. This indicates that while there is cautious optimism, some investors are still wary of broader market conditions.
Analyst Ratings: Many analysts have raised their price targets for Netflix, reflecting a positive outlook on the stock's potential for further gains. The company's ability to attract new subscribers and increase profitability is seen as a strong indicator of its growth prospects.
Conclusion
Netflix's business is built on economies of scale, and the recent subscriber additions enhance this advantage. All indicators suggest that Netflix remains an excellent business. Therefore, I reiterate my recommendation to keep Netflix stock rated as a buy. In summary, Netflix's strong performance, strategic priorities, and massive scale make it a compelling buy for long-term investors.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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