In the tech sector, the general sentiment for 2023 and 2024 has been that if it's not involved in artificial intelligence (AI), it gets ignored. I'm just as guilty of this as others, which has caused me to miss one of 2024's best-performing stocks: Netflix (NFLX 0.86%). Netflix is up more than 50% year to date, which would make it the third-best performing "Magnificent Seven" stock (behind Nvidia and Meta Platforms) if it were included in the group.
Does Netflix deserve to be considered a top tech stock? After all, its business has been crushing it lately.
Netflix's latest results were quite impressive
Netflix fell off most investors' radars after it crashed in mid-2022. However, since it bottomed in July 2022, it has been on a steady march up to its new all-time high, set just a few days ago.
NASDAQ: NFLX
Key Data Points
While many had doubts about how Netflix could turn streaming into a profitable business, it has done quite well. Many profit-boosting efforts, like launching an advertising tier and cracking down on password sharing, have worked out well and are a huge reason why Netflix has done so well.
In Q3, revenue rose 15% to $9.8 billion, marking the fourth consecutive quarter that it has grown at a pace in the mid-teens. Management expects to extend that growth into five straight quarters, as it projects 14.7% revenue growth for Q4.
However, with Netflix in a more mature company stage, investors aren't as worried about revenue growth as they are about profits. In Q3, earnings per share (EPS) came in at $5.40, up from $3.73 a year ago (45% growth). In Q4, Netflix expects even stronger EPS growth, with $4.23 expected, indicating 100% year-over-year growth.
That's about as good a result as any investor could ask for, so it's no wonder that Netflix's stock price jumped 11% the day after it reported earnings.
But after the run Netflix has had, is it still a good buy from a valuation standpoint?
The stock isn't cheap, but you must pay up for premium companies
Netflix stock isn't cheap. It's valued at a pretty pricey valuation despite the impressive growth it has put up.
NFLX PE Ratio data by YCharts
At 43 times trailing earnings and 32 times 2025 earnings, Netflix is far more expensive than some of its tech peers.
Probably the best company to compare Netflix to is Meta Platforms, one of the few tech stocks that outperformed Netflix this year. In its latest quarter, Meta's revenue rose 22% year over year, and EPS rose 73%. However, the stock trades for 30 times trailing earnings and 24 times 2025 earnings, so it's a bit cheaper for similar business performance.
However, that doesn't mean Netflix is a worse stock than Meta. One thing Netflix has going for it is that not all of its revenue is tied to advertising, unlike Meta. The advertising market is cyclical and goes through downturns as recessions approach or when the economy enters one. Netflix is a subscription service alongside an ad business, so its approach is more balanced.
Netflix is far from a cheap stock -- the time for that has come and gone. Now, it has returned to levels that only the most established and well-run tech players trade at, but it has earned its spot at the table.
I think Netflix belongs back in the conversation of best tech companies, based on its execution and plans to continue growing (Netflix is adding a boxing match and some NFL games in Q4). However, investors shouldn't ignore the fact that the stock is very expensive, and Netflix needs to maintain its top-notch execution to stay valued as it currently is.
