Netflix Faces Significant Tests on January 21, a Day That Investors Should Keep an Eye On.
Netflix's stock saw a significant surge, tripling between 2023 and the end of 2024. With the streaming giant set to report fourth-quarter earnings on January 21, investors are eager to learn about the company's year-end performance, content plans for 2025, and potential price adjustments in 2025.
Why is Netflix thriving, and should investors consider buying now? Let's delve into the reasons behind Netflix's resurgence.
The building blocks of Netflix's success
A turnaround in performance
Netflix's business took a dip in 2022, mirroring a broader sell-off in growth stocks. Margins fell, and the validity of the streaming giant's business model came under questioning. Since then, the company has managed a return to sales growth and achieved all-time-high operating margins.
The importance of engagement
Netflix places significant importance on the metric of screen time. Screen time, rather than subscriber numbers, is crucial because it measures engagement. In Q2 2024, Netflix reported that streaming now accounts for 40.3% of U.S. daily TV screen time, surpassing cable and broadcast combined. With a staggering 8.4% share of this total, Netflix trails only Alphabet's YouTube, indicating a stronghold in the streaming market.
Quality content over quantity
While Netflix continues to produce a high volume of content, its strategy now concentrates on delivering quality programming across various genres and interest areas. This shift away from a sole focus on quantity has contributed to the company's success and differentiates it from competitors in the market.
Fourth-quarter expectations
Netflix projects Q4 revenue of $10.13 billion, representing a 14.7% year-over-year increase. While operating margins are expected to decrease due to seasonality, the company anticipates a 46.4% increase in operating income and 21.6% operating margins – a 4.7-percentage-point increase compared to Q4 2023.
Investors will be interested in the performance of Netflix's holiday season content slate and any insights into full-year 2025 expectations. Boasting hit shows such as Squid Game (Season 2), Outer Banks (Season 4), and Love is Blind (Season 7), Netflix has a strong content slate for the quarter. How these shows perform and what's in store for 2025 will be vital pieces of information for investors.
Rising prices?
In 2023, Netflix discontinued its Basic Program and introduced a Standard with Ads package at $6.99 per month, while keeping the Standard price at $15.49 and increasing the Premium cost to $22.99. Given the pricing history, there's a strong possibility that the Standard option could see an increase in 2025, potentially coinciding with an adjustment in the Standard with Ads package, too.
Assessing Netflix's valuation
Netflix's P/E ratio is 49, while its forward P/E ratio is 36. This implies that should its earnings grow based on current expectations, the stock would have a 36 P/E. While Netflix merits a premium valuation, the question of how much remains a matter of debate. If the company manages to maintain or increase its market share in streaming, and the streaming sector continues to gain ground against traditional TV providers, investor appetite for Netflix may persist.
However, the stock is not a bargain at its current price. For risk-takers, opening a starter position in Netflix presents an intriguing opportunity, while the company merits a spot on the watchlist for more cautious investors. If Netlix decides to implement a price increase this year, its share price could see a surge.
Proving its worth at a high price
Netflix demonstrated its proficiency in delivering quality content across various genres in 2024. The stock may be pricey, but its long-term growth prospects should not be underestimated, especially if the company clears the hurdle of justifying future price increases through long-term revenue growth and future market expansion.
As Netflix prepares to reveal its Q4 earnings, investors will be watching closely to determine whether the holiday season content slate proved to be a blockbuster success and if the company is confident in its ability to deliver another strong year in 2025. With Netflix set to prove its worth as a growth stock, it's best to follow the company's performance from the sidelines until a more compelling investment opportunity arises.
Given Netflix's impressive growth and strong market position, some investors may be considering investing in the company. However, with Netflix's stock currently expensive, it might be wise to invest in a diversified portfolio or consider a starter position, as a significant price increase could occur if the company decides to adjust its pricing strategy in 2025.
To maximize returns, investors should closely watch Netflix's Q4 earnings report, as it will provide valuable insights into the company's content slate performance and future content plans for 2025. This information will help investors assess whether Netflix can maintain or increase its market share and justify any potential future price increases.
