Netflix's (NFLX 2.52%) stock soared 11% on Jan. 24 after the streaming-video giant posted its fourth-quarter earnings report. Revenue rose 12.5% year over year to $8.83 billion and exceeded analysts' estimates by $120 million. Net income surged a whopping 1,605% to $938 million, or $2.11 per share, but still missed the consensus forecast by $0.11 due to an unrealized loss related to currency headwinds for its euro-denominated debt.
Netflix's impressive numbers likely stunned the bears, who had assumed its high-growth days were over. However, its stock remains more than 20% below its all-time high and it is still the least valuable FAANG company, with an enterprise value (EV) of $249 billion.
Could Netflix's valuation continue to rise and catch up to Meta Platforms (META 2.61%), the second smallest FAANG stock with an EV of $979 billion, by the end of 2025?
Image source: Getty Images.
How Netflix proved the bears wrong
The bears had expected Netflix's growth to slow down as aggressive competitors like Disney, Warner Bros. Discovery, Paramount Global, and Amazon carved up the streaming market. The bears also believed that competitive pressure would squeeze its operating margins as it was forced to lower its subscription fees and ramp up its spending on new content.
The bears initially seemed to be right when Netflix's year-over-year revenue growth decelerated throughout all eight quarters of 2021 and 2022. The introduction of an ad-supported tier and password-sharing plans also suggested it was starved for new subscribers and revenue.
But in 2023, revenue growth stabilized and accelerated again in the final two quarters. It also started growing its paid subscribers by double digits again after nine sluggish quarters of single-digit growth.
|
Metric |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Paid subscribers (millions) |
230.75 |
232.50 |
238.39 |
247.15 |
260.28 |
|
Growth (YOY) |
4% |
4.9% |
8% |
10.8% |
12.8% |
|
Revenue |
$7.85B |
$8.16B |
$8.19B |
$8.54B |
$8.83B |
|
Growth (YOY) |
1.9% |
3.7% |
2.7% |
7.8% |
12.5% |
Data source: Netflix. YOY = year over year.
Netflix attributed that acceleration to the rollout of its new paid sharing plans, price hikes for its existing subscribers, favorable currency movements, and "stronger than anticipated" membership growth. It expects that momentum to continue, with 13.2% year-over-year revenue growth in the first quarter of 2024.
Netflix's ability to raise its prices in this competitive environment counters the bearish notion that it will need to reduce its fees to keep growing. It's also phasing out its cheapest ad-free Basic plan to drive more subscribers toward its ad-supported tiers -- which suggests it's confident in its ability to expand its advertising ecosystem while retaining its existing subscribers.
As a result, Netflix's operating margin more than doubled year over year to 16.9% in the fourth quarter and expanded for the full year from 18% in 2022 to 22% in 2023. It expects its operating margin to expand both sequentially and year over year to 26.2% in the first quarter of 2024 -- which reinforces the bullish thesis that Netflix is the only streaming leader that can generate consistent profits while gaining millions of new subscribers each quarter.
NASDAQ: NFLX
Key Data Points
But could Netflix be worth more than Meta by 2025?
Analysts expect Netflix's revenue to rise 14% in 2024 and 12% in 2025, but I wouldn't be surprised if they hastily boosted those estimates in response to the company's latest numbers. They expect earnings per share (EPS) to grow 39% in 2024 and 24% in 2025. But at 33x forward earnings, a lot of that growth has already been priced into Netflix's stock.
Meanwhile, Meta's revenue is expected to rise 13% in 2024 and 12% in 2025 as its core advertising business recovers in a warmer macro environment and it expands its Reels short-video platform. EPS is expected to grow 21% in 2024 and 14% in 2025 -- even as the company ramps up its spending on its unprofitable Reality Labs segment and expands its massive data centers. But when compared to Netflix, Meta's stock still looks reasonably valued at 22x next year's earnings.
For Netflix to match Meta's current EV by the end of 2025, its stock would need to quadruple to nearly $2,200 -- more than 100x its projected earnings for 2025 -- over the next two years. That scenario isn't impossible, since Netflix traded at over 100x its trailing earnings back in 2019. But it could be difficult to reach and maintain that lofty valuation again.
Even if Netflix stretches its valuation to nearly $1 trillion by 2025, Meta could be worth much more by then. Netflix's shares still have plenty of room to run. However, the company will likely remain the least valuable FAANG stock for the foreseeable future.
