Netflix continues to extend its lead as the world’s largest streaming platform.
The S&P 500 is up 22% this year, which is more than twice its average annual return since it was established in 1957. The index continues to set new record highs, cementing the bull market that began in October 2022.
The technology sector is leading the broader market higher, and it isn’t just artificial intelligence stocks. Shares of streaming giant Netflix (NFLX -1.96%) are up a whopping 54% year to date, thanks to a string of blockbuster quarterly reports showing rapid subscriber and revenue growth.
Netflix just reported its latest financial results for the third quarter of 2024 (ended Sept. 30), and they comfortably beat Wall Street’s expectations. Here’s why the stock could be the ultimate long-term bull market buy.
Netflix added more subscribers than expected during Q3
Wall Street estimated that Netflix would add 4.5 million new subscribers during the third quarter, but the actual number came in at almost 5.1 million. The company now has 282.7 million total subscribers, making it the largest streaming platform in the world by a wide margin — Disney‘s Disney+ is a distant second with 153.8 million.
Netflix’s advertising tier accounted for half of all new signups during Q3 (in countries where it’s available), and the total ad-tier subscriber base grew by 35% from just three months earlier. Priced at just $6.99 per month, Netflix with ads was designed to attract new users who don’t want to pay for the Standard tier ($15.49 per month) or the Premium tier ($22.99 per month).
The ad tier was launched in late 2022, so it’s still very early. Netflix is focused on acquiring signups because businesses will pay premium rates for ad slots only if they can reach a large enough audience. For that reason, Netflix’s ad inventory is currently growing faster than the company’s ability to monetize it, and it could be a couple of years before demand outstrips supply. Netflix does expect advertising revenue to double in 2025, although from a relatively small base in 2024.
Netflix generated a record $9.8 billion in total revenue during Q3, a 15% increase from the year-ago period. That growth rate marked a modest sequential deceleration (from 16.8% in the second quarter), but advertising could be the secret to faster revenue increases over the long term. That’s because businesses are forecast to spend over $60 billion on television advertising during 2024 in the U.S. alone (according to Statista), which is a huge opportunity for Netflix to grow into.
Live programming is a game changer for Netflix
Engagement is one of the keys to growing advertising revenue. The longer each ad-tier subscriber spends streaming content, the more ads they will see, which translates to more revenue for Netflix. At the moment, members spend an average of around two hours watching Netflix every day, but live programming has the potential to boost that number.
Earlier this year, Netflix signed a decade-long contract with TKO Group to become the exclusive home of World Wrestling Entertainment (WWE). Starting in January 2025, WWE Raw will stream live on Netflix every single week worldwide, with Smackdown and NXT also streaming every week outside of America. Additionally, the deal includes several live special events throughout the year, like WrestleMania and SummerSlam.
Overall, the WWE partnership alone will bring several hours of live programming to Netflix every week.
Netflix will also exclusively livestream the Mike Tyson vs. Jake Paul boxing match in November, along with both Christmas Day NFL games in December. The average NFL game runs for three hours and 12 minutes, so a single game will drive above-average engagement for any subscriber who watches it from end to end.
Plus, live events like the NFL’s are a huge draw for advertisers. They could entice a lot of businesses to market their products on Netflix for the first time.
Image source: Netflix.
Netflix stock might be cheap based on its future potential
Netflix stock is currently trading at an all-time high on the back of its year-to-date gain of 63%. Based on the company’s $17.67 in trailing-12-month earnings per share, the stock is sitting at a price-to-earnings (P/E) ratio of 43.2, which is a premium to the 32.1 P/E ratio of the Nasdaq-100 technology index.
From that perspective, Netflix stock looks quite expensive. However, Wall Street expects the company to generate $23.11 in earnings per share in 2025, which places the stock at a more reasonable forward P/E ratio of 33. In other words, given the pace of Netflix’s growth, its stock might actually be cheap at the current price for any investor willing to hold on to it for at least a couple of years.
But investors should probably be looking even further into the future. Netflix accounts for less than 10% of the total time people spend watching TV in the U.S. — and streaming overall has a market share of just 40%. Both of those numbers are steadily growing, which will boost Netflix’s revenue and earnings over time.
Plus, Netflix’s management team believes its financial opportunity is worth more than $600 billion across streaming subscriptions, advertising, and gaming, and since the company has captured only around 7% of that so far, investors could be looking at steady returns for the next decade or more.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends TKO Group Holdings. The Motley Fool has a disclosure policy.
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