Netflix (NFLX 0.10%) stock tripled between 2023 and the end of 2024. With the streaming giant set to report fourth-quarter earnings on Jan. 21, investors will want to know how the business finished the year, content spending plans for 2025, and whether Netflix plans to increase prices this year.
Here's why Netflix is at the top of its game with no signs of slowing down, and whether the growth stock is worth buying now.
Image source: Getty Images.
The anatomy of Netflix's breakout
The following chart showcases the importance of Netflix's sales and operating margin growth.
NFLX Revenue (TTM) data by YCharts.
The stock tumbled in 2022, along with a broader sell-off in growth stocks, as Netflix's margins fell and investors questioned the viability of its business model. Since then, Netflix has returned to sales growth and is producing all-time-high operating margins.
At first glance, Netflix's business model seems fairly risky. The company spends several billion dollars a year producing content that it hopes will appeal to audiences by increasing engagement on the platform and justifying future price increases. If Netflix loses audience interest with weak content, or its customers simply gravitate toward other streaming platforms, the business could suffer a serious slowdown.
I think it's important to realize that Netflix is not the same company it was even a few years ago. It has learned from past mistakes, where it focused too much on quantity rather than quality. Netflix still produces a ton of content and has its fair share of flops. But it also has massive successes across different categories, making it stand out from the competition.
The best metric to use when measuring Netflix's value is screen time. Screen time is more important than subscriber numbers because it accounts for engagement. In Netflix's second-quarter 2024 shareholder letter, the company cited a report by Nielsen saying that streaming makes up 40.3% of U.S. TV screen time per day, compared to 27.2% for cable, 20.5% for broadcast, and 12% other. Of the total screen time per day, Alphabet's YouTube makes up 9.9%, followed by Netflix at 8.4% -- meaning that those two services combined currently comprise a whopping 45% of U.S. TV streaming screen time.
In Netflix's third-quarter shareholder letter, the company said that each paid membership averaged two hours per day of screen time -- an incredibly impressive figure. The company attributed its combination of licensed and original series and films and new exposure to games and live events as a compelling value package, relative to other streaming services that are pressured to bundle and discount their offerings to retain and attract users.
In each shareholder letter, Netflix discusses viewership of hit shows and its upcoming content slate. Blockbuster shows like Squid Game (Season 2), Outer Banks (Season 4), and Love is Blind (Season 7) all came out during the fourth quarter, which Netflix reports Tuesday. So investors should take note of how these shows performed and what's in the works for 2025.
Q4 expectations
Netflix is guiding for $10.13 billion in Q4 revenue, which would be its highest quarterly revenue ever and a 14.7% year-over-year increase. Operating margins are expected to decline to 21.6%, but that's typical seasonality with Netflix's Q4, which tends to be the lowest-margin quarter of the year. Compared to Q4 2023, Netflix is expecting a 46.4% increase in operating income and 21.6% operating margins -- a 4.7-percentage-point increase.
Again, the focus should be more on how Netflix's holiday season content slate performed and on full-year 2025 expectations. Investors will want to see Netflix sustain its mid-teens revenue growth and mid- to high-20% operating margins.
A possible price increase
In 2023, Netflix phased out its Basic Program and implemented a Standard with Ads package at $6.99 per month, while pricing Standard at $15.49 per month and Premium at $19.99 per month. Standard has stayed $15.49 per month since 2022, and Premium increased to $22.99 per month in 2024.
If I had to guess, I'd say we are due for a price increase in the Standard option in 2025, and possibly in Standard with Ads as well.
Investors should take note of management's tone on the earnings call regarding a possible price increase. On the Q3 earnings call, Netflix discussed its long-term monetization cycle. It basically stated that it should be able to justify future price increases as long as it delivers quality programs across a variety of categories and interests. That formula is what makes Netflix the elite streaming provider that can appeal to various interests to keep a household engaged.
A stretched valuation
Since Netflix has only focused on substantial earnings growth (rather than just on sales growth) for the last five years, the price-to-earnings (P/E) ratio is now arguably the best metric for considering Netflix's valuation.
Netflix's P/E is 49, and its forward P/E ratio is 36. This means that analyst consensus estimates would give the stock a 36 P/E based on the current price and the next 12 months of earnings. That makes Netflix far more expensive than other communications giants like Meta Platforms, which has a forward P/E of 24, and Alphabet, which has a forward P/E of 22.
Netflix definitely deserves a premium valuation, but the question is, how much? If Netflix can continue growing its market share in streaming, and streaming continues to take market share from cable and broadcast, then it stands to reason that Netflix can grow into its valuation over time. But right now, the stock is far from cheap, and investors must pay top dollar if they want a slice of the Netflix pie.
I think now is a great time for risk-tolerant investors to open a starter position in Netflix, and for most investors to simply keep the company on a watchlist. However, the company could accelerate its earnings growth if it implements a price increase this year.
Netflix has to prove it's worth an ultra-premium valuation
In the past, Netflix struggled with content spending. It would have too many flops, and its hits were inconsistent. Today, Netflix is thriving across a variety of categories, from live events to dramas, comedies, historical pieces, and niche interests.
The stock is on the expensive side, but it could still be worth buying if you believe in the long-term future of the business.
The upcoming earnings call is incredibly important for the company. It will indicate whether the Q4 content slate was as much of a showstopper as Netflix hinted it could be, and if the company is confident that it can stage a successful encore in 2025. So, there's nothing wrong with following Netflix from the sidelines until the valuation is more compelling.
Netflix has nothing to prove as a company, but it has a lot to prove as a stock, given its lofty valuation.
