One of the biggest secular headwinds in recent years has been the rise of artificial intelligence (AI). The latest advances in AI went viral early last year, and the list of companies in the $1 trillion club is littered with companies at the forefront of this next-generation technology.
For example, Apple products – including Siri and Maps – have always embraced AI Microsoft, Alphabet, AmazonAnd Metaplatforms have developed seemingly impenetrable moats by deeply integrating AI into their respective business operations. Nvidia And Taiwanese semiconductor manufacturing have developed the chips that make AI possible.
Netflix (NASDAQ:NFLX) is one of the pioneers of AI, using advanced algorithms to inform its streaming recommendations and production choices, yet the company has fallen out of favor with some who are busy chasing the latest shiny new thing. Investors may be surprised to learn that Netflix just delivered another quarter of double-digit growth. With a market capitalization of just $324 billion, it may seem premature to suggest Netflix wants to join its peers in the trillion-dollar club, yet the stock is up more than 100% in the past year and 1,380% in the past decade. and the evidence suggests its advance will continue.
Bullish results
Netflix just reported third-quarter results and exceeded expectations on all key metrics. Revenue of $9.83 billion rose 15% year over year, generating robust earnings growth while earnings per share (EPS) of $5.40 rose 45%. Revenue was driven by strong growth in the number of paid subscribers, which rose by more than 5 million, an increase of 14%. Operating profit was driven higher by a growing operating margin that rose by as much as 720 basis points to 29.6%.
For context, analyst consensus estimates were for revenue of $9.77 billion and earnings per share of $5.12, accompanied by 4.5 million subscribers, so Netflix fared better across the board.
Perhaps more importantly, management expects growth to continue. Netflix expects fourth-quarter revenue of $10.1 billion, an increase of almost 15%, while earnings per share of $4.23 would more than double.
Incremental levers for growth
During the earnings conference call, Netflix announced plans to continue its impressive growth, highlighting three particularly important opportunities.
Netflix has been in the video game business for a while, but the company is starting to see increased interest from its audience in the games, based on the company’s growing library of intellectual property. Management is particularly enthusiastic about the title it is based on Squid gamethe company’s most-watched series.
Management is also leaning on recent successes with live events. Netflix will live stream a boxing match between Mike Tyson and Jake Paul on November 15. The company also has exclusive rights to two NFL games on Christmas Day: the Super Bowl LVII-winning Kansas City Chiefs versus the Pittsburgh Steelers, and the Baltimore Ravens versus the Houston Texans. Finally, Netflix is the new home of WWE Raw, the top-rated wrestling entertainment show, with weekly episodes beginning in January 2025.
However, the biggest opportunity for the company lies in its growing digital advertising business. Netflix noted on the call that its audience and ad inventory are currently growing faster than the company’s ability to capitalize on that growth. The number of members signing up for the lowest-priced ad tier increased 35% quarter-over-quarter and accounted for 50% of new members in countries where Netflix advertises.
The company has a number of key initiatives designed to accelerate its advertising business. First, Netflix is launching its own ad server, starting this quarter in Canada and then in the rest of its ad markets in 2025. The company is also leaning on its partnership with The Trade Bureau to expand its advertising reach. Netflix noted that ad-tier members are comparable to other subscribers in terms of hours watched and preferred titles, demonstrating that viewing patterns are consistent. Management expects advertising revenue to double by 2025 (on a small basis).
Each of these initiatives represents an incremental growth driver, illustrating how Netflix plans to continue its robust growth.
The Road to $1 Trillion
Netflix currently has a market cap of $323 billion, which means it will need a share price gain of about 207% to take its value to $1 trillion, but there is a clear path for growth over the next decade. According to Wall Street, Netflix is expected to generate revenues of $38.74 billion in 2024, giving it a price-to-sales ratio (P/S) of around 8. Assuming P/S remains constant, Netflix should grow its revenue. sales to approximately $357 billion per year to support a market cap of $1 trillion.
Wall Street currently predicts revenue growth for Netflix of about 26% per year over the next five years. If the company hits that benchmark, then it is could reaching a market capitalization of $1 trillion as early as 2035. It’s worth noting that Netflix has grown its annual revenue by 562% over the past decade and its net income by 1,450%, so Wall Street’s outlook could well be conservative. Furthermore, as this quarter shows, Netflix has a habit of exceeding Wall Street expectations, which could also shave years off this timeline.
Finally, Netflix currently sells for roughly 39 times earnings, which may seem expensive at first glance, but consider this: Wall Street expects Netflix to generate earnings per share of $23.11 in 2025, which would be a multiple of 30 – the same as the S&P500. Given Netflix’s strong track record of growth and the significant opportunities it presents, I’d say this is a fair price to pay for a company that is expected to generate consistent double-digit growth over the next five years.
Don’t miss this second chance at a potentially lucrative opportunity
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
-
Amazon: If you had invested $1,000 when we doubled in 2010, you would have $21,121!*
-
Apple: If you had invested $1,000 when we doubled in 2008, you would have $43,917!*
-
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $370,844!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns October 14, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Danny Vena holds positions at Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia and The Trade Desk. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Taiwan Semiconductor Manufacturing, and The Trade Desk. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Meet the Unstoppable Supply That Could Join Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta and Taiwan Semiconductor Manufacturing in the $1 Trillion Club by 2035, originally published by The Motley Fool
