Facing Competition, The Streaming Platform Will Focus On Original Content And Live Events To Boost Future Subscriber Engagement

Key Takeaways

• Strategic focus on original programming and live events aims to boost subscriber growth and retention, driving potential revenue increases.
  
• Innovative ad formats and pricing strategies target enhanced user engagement and satisfaction, aiming for sustained long-term revenue growth.
  
• Rising competition and alternative platforms may hinder Netflix's market share growth, while economic and strategic challenges could strain revenue and engagement.

Catalysts

Provides entertainment services.

• Netflix's plan to grow engagement through original programming across multiple countries is expected to drive membership growth, which could lead to increased revenue. Streaming hits from global markets demonstrate their potential to capture untapped demand.
  
• The expansion of Netflix's advertising business, particularly in untapped markets and the introduction of innovative ad formats, is likely to become a more significant contributor to revenue growth, aligning with a broader trend toward monetizing user engagement.
  
• Investments in live events, including sports and exclusive shows, could strengthen subscriber retention and acquisition, supporting revenue growth by providing unique, high-engagement content.
  
• Continuous improvement in product experiences, such as the revamped TV homepage, is anticipated to enhance user engagement and satisfaction, potentially stabilizing or increasing average revenue per member (ARM) by making the platform more attractive.
  
• Netflix's pricing strategy, which focuses on delivering value before implementing price increases, aims to drive long-term revenue growth while maintaining customer satisfaction and reducing churn.

Netflix Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Netflix's revenue will grow by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.7% today to 26.1% in 3 years time.
• Analysts expect earnings to reach $13.5 billion (and earnings per share of $32.0) by about December 2027, up from $7.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.2x on those 2027 earnings, down from 51.5x today. This future PE is greater than the current PE for the US Entertainment industry at 16.1x.
• Analysts expect the number of shares outstanding to decline by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Netflix Future Earnings Per Share Growth

Risks

• Increased competition from major players in the entertainment industry and the rise of alternative media platforms like YouTube could impact Netflix's ability to grow its market share, affecting revenue and engagement.
  
• Netflix's ability to monetize its advertising inventory effectively is still developing, which could impede its potential revenue growth from ads in the near term.
  
• Economic factors, including foreign exchange rate fluctuations and potential price sensitivity among consumers, particularly with membership price increases, could impact revenue and net margins.
  
• The impact of Hollywood labor disputes, which have previously caused production delays, might continue to affect content delivery schedules, potentially impacting viewer engagement and overall retention rates.
  
• Netflix's significant investments in new initiatives like live events and gaming involve long-term development timelines and could strain earnings if these initiatives do not generate expected returns.

Valuation

• The analysts have a consensus price target of $805.69 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 $1100.0, and the most bearish reporting a price target of just $550.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $51.8 billion, earnings will come to $13.5 billion, and it would be trading on a PE ratio of 31.2x, assuming you use a discount rate of 7.4%.
• Given the current share price of $936.56, the analyst's price target of $805.69 is 16.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.