Global Ad Tech And Gaming Will Open New Markets

Key Takeaways

• Netflix aims to expand its market by increasing engagement, consumer spending, and advertising revenue, focusing on proprietary ad tech growth.
  
• Strategic moves into gaming and global content investment may drive significant revenue and international diversification, enhancing profit margins.
  
• Netflix's increased content spending, economic risks, competition, and challenges in monetizing new initiatives may impede revenue stability and long-term earnings growth.

Catalysts

Provides entertainment services.

• Netflix aims to significantly expand its addressable market by increasing its share of TV hours, engagement, and consumer spend, indicating potential for substantial revenue growth.
  
• The introduction and expansion of Netflix's proprietary ad tech platform in numerous markets may help to double advertising revenue by 2025, enhancing overall revenue and profit margins.
  
• The expansion into gaming represents a strategic opportunity for Netflix, targeting a $140 billion market, which could become a significant revenue driver with a focus on immersive narrative games and other engaging content.
  
• Netflix is investing in global content production, with commitments in countries like Korea, Mexico, and the UK, which may lead to broader international adoption and revenue diversification.
  
• The company's strategy to leverage AI technologies for content creation and production efficiencies could improve cost structures and net margins, allowing for reinvestment into higher-quality content offerings.

Netflix Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Netflix's revenue will grow by 11.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.1% today to 28.5% in 3 years time.
• Analysts expect earnings to reach $16.0 billion (and earnings per share of $38.42) by about April 2028, up from $9.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $13.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.5x on those 2028 earnings, down from 47.8x today. This future PE is greater than the current PE for the US Entertainment industry at 21.8x.
• Analysts expect the number of shares outstanding to decline by 1.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.24%, as per the Simply Wall St company report.

Netflix Future Earnings Per Share Growth

Risks

• Netflix's reliance on increased content spending to drive growth may not yield expected returns if the additional investment does not enhance long-term revenue significantly or contribute to an improvement in net margins.
  
• Economic downturn and potential recession risks could lead to consumers opting for lower-cost plans, impacting overall average revenue per user and slowing down revenue growth.
  
• Increased competition from other streaming platforms, as well as traditional TV, may hinder Netflix's ability to expand its market share, impacting revenue growth and overall market penetration.
  
• Uncertainty in global markets and Netflix's expansion into multiple international markets may expose it to economic volatility, currency fluctuations, and geopolitical risks, potentially impacting revenue stability and profit margins.
  
• The challenge of effectively monetizing its gaming and ad-supported plans may lead to lower-than-anticipated earnings growth if these initiatives do not capture the projected market share or user engagement.

Valuation

• The analysts have a consensus price target of $1094.422 for Netflix based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1514.0, and the most bearish reporting a price target of just $710.33.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $56.4 billion, earnings will come to $16.0 billion, and it would be trading on a PE ratio of 35.5x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $1040.34, the analyst price target of $1094.42 is 4.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.