Global Connectivity And Personalized AI Will Drive On-Demand Streaming

Key Takeaways

• International subscriber growth, local content investment, and high-speed internet expansion drive scalable, sustainable revenue and margin improvement across a broad global market.
  
• Proprietary ad tech, data-driven personalization, and the shift from traditional TV enable higher user engagement, retention, and incremental high-margin income streams.
  
• Rising production costs, regulatory challenges, competition, and shifting consumer habits threaten Netflix’s revenue growth, pricing power, profitability, and long-term subscriber retention.

Catalysts

Provides entertainment services.

• There is significant headroom for subscriber growth internationally, as Netflix remains a minority in its addressable market with less than 10 percent of TV hours and about 6 percent of consumer spend and ad revenue in served markets; this positions the company to benefit financially from continued proliferation of high-speed internet and mobile connectivity in emerging regions, boosting future revenue growth.
  
• Ongoing global consumer shift away from traditional linear TV towards on-demand streaming is accelerating cord-cutting, allowing Netflix—already a category leader in streaming view share—to capture a growing share of entertainment spend, supporting both higher top-line revenue and long-term operating income expansion.
  
• Strategic expansion and rapid development of a proprietary ad tech platform, alongside ad-supported subscription tiers, is creating a high-margin, incremental revenue stream that will scale with the growth of the global digital advertising market, improving earnings and supporting margin growth as ad sales double in 2025 and scale further with continued targeting and personalization capabilities.
  
• Netflix’s deepening investment in high-quality local-language original content across multiple international markets not only differentiates its library and reduces reliance on third-party content, but also increases pricing power and unlocks new organic growth channels, thereby supporting sustainable net margin improvement and global revenue scalability over the long term.
  
• Advanced personalization enabled by data, artificial intelligence, and continual improvements to recommendation technology—including upcoming launches of a more intuitive user interface and AI-powered interactive search—are expected to maximize user engagement and retention, translating into higher per-user monetization and enhanced long-term lifetime value.

Netflix Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Netflix compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Netflix's revenue will grow by 12.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 23.1% today to 30.4% in 3 years time.
• The bullish analysts expect earnings to reach $17.3 billion (and earnings per share of $41.66) by about May 2028, up from $9.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 41.7x on those 2028 earnings, down from 52.2x today. This future PE is greater than the current PE for the US Entertainment industry at 22.4x.
• 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 8.32%, as per the Simply Wall St company report.

Netflix Future Earnings Per Share Growth

Risks

• Intensifying digital regulation and tougher privacy laws worldwide may hinder Netflix’s ability to offer personalized advertising and content recommendations, undercutting user engagement and average revenue per user, and therefore impeding both revenue and margin expansion.
  
• Escalating costs for original content production, including large international production commitments in markets like Mexico, Korea, and the UK, threaten to outpace subscriber and revenue growth, compressing operating margins and putting pressure on earnings over the long term.
  
• The global pushback on password sharing may deliver a temporary boost in paid accounts, but could simultaneously increase subscriber churn and create reputational issues among consumers, undermining sustainable revenue growth and retention rates.
  
• Heightening streaming industry fragmentation, with rapid re-bundling via smart TV or telecom aggregators and increased competition from local and global rivals, could diminish Netflix’s direct access to customers and erode its pricing power, thereby constraining revenue growth.
  
• Broader secular headwinds such as persistent global inflation, income inequality, and rising consumer preference for free or bundled digital services could limit consumers’ willingness to pay for standalone streaming, leading to higher churn and stagnant subscriber gains, and thus impacting both revenue and net profit growth.

Valuation

• The assumed bullish price target for Netflix is $1385.02, which represents two standard deviations above the consensus price target of $1096.58. This valuation is based on what can be assumed as the expectations of Netflix's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 $720.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $57.0 billion, earnings will come to $17.3 billion, and it would be trading on a PE ratio of 41.7x, assuming you use a discount rate of 8.3%.
• Given the current share price of $1137.69, the bullish analyst price target of $1385.02 is 17.9% higher.
• 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.