Key Takeaways

Strategic investments in diverse content, ad-supported tiers, and live events support subscriber growth, retention, and revenue enhancement.

Video game strategy leveraging existing IP aims to increase engagement, acquisition, and growth in the gaming market.

Currency volatility, increased content spending, and cautious sports investments pose financial risks and opportunities against strong advertising growth and natural disaster disruptions.

Catalysts

About Netflix

Provides entertainment services.

What are the underlying business or industry changes driving this perspective?

Netflix is emphasizing broad-based content strength, investing in a diverse slate of programming across multiple genres globally. This approach is likely to drive consistent subscriber growth and retention, thereby increasing revenue.

The introduction and scaling of its ad-supported subscription tier is driving significant user sign-ups and engagement, which can lead to doubling ad revenue year-over-year. This can enhance Netflix's earnings and overall margins as the advertising inventory becomes increasingly monetized.

Netflix's investment in its own ad technology stack is expected to improve advertiser experience, increase ad sales flexibility, and drive revenue growth by enhancing the monetization of its ad-supported model.

The company's strategic shift towards live events, including sports and global entertainment content such as the FIFA Women's World Cup, could attract a broader audience, enhance subscriber retention, and drive revenue growth through increased engagement.

With Netflix's progressive rollout of a robust video game strategy that leverages its popular IP, it aims to boost engagement and retention, contributing to subscriber acquisition and long-term revenue growth in the rapidly expanding gaming market.

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Netflix's revenue will grow by 12.2% annually over the next 3 years.
Analysts assume that profit margins will increase from 22.3% today to 27.6% in 3 years time.
Analysts expect earnings to reach $15.2 billion (and earnings per share of $36.21) by about March 2028, up from $8.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $17.3 billion in earnings, and the most bearish expecting $13.3 billion.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.1x on those 2028 earnings, down from 42.6x today. This future PE is greater than the current PE for the US Entertainment industry at 23.4x.
Analysts expect the number of shares outstanding to decline by 0.74% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 7.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

The wildfires in Southern California, while not causing immediate financial impact on 2025 plans, highlight the risk of natural disasters potentially disrupting future productions and cash flow. [Impact: Operations, Cash Flow]
The shift in U.S. dollar strength and related foreign exchange volatility poses a risk to Netflix's margin targets, particularly since 60% of its revenue is in non-U.S. dollar currencies. [Impact: Margins, Earnings]
While Netflix is seeing significant growth in its advertising segment, the company acknowledges ongoing work to enhance monetization, indicating potential risks if the advertising infrastructure does not scale as expected. [Impact: Revenue]
Netflix's cautious approach to acquiring full season sports rights due to challenging economics suggests potential missed opportunities in a rapidly growing live sports market if it cannot effectively monetize large events. [Impact: Revenue Growth Opportunities]
The substantial increase in cash content spending from $17 billion to $18 billion in 2025, without reaching an equilibrium, raises questions about future financial sustainability and the ability to generate proportional returns on this investment. [Impact: Cash Flow, Profits]

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $1071.737 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 $1494.0, and the most bearish reporting a price target of just $700.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $55.0 billion, earnings will come to $15.2 billion, and it would be trading on a PE ratio of 37.1x, assuming you use a discount rate of 8.0%.
Given the current share price of $866.68, the analyst price target of $1071.74 is 19.1% 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.

How well do narratives help inform your perspective?

Disclaimer

The user Jonh has a position in NasdaqGS:NFLX. Simply Wall St has no position in any of the companies mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The author of this narrative is not affiliated with, nor authorised by Simply Wall St as a sub-authorised representative. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimates are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.