How Netflix Stock Can Climb To $1,000

Could Netflix stock (NASDAQ:NFLX) reach $1,000 in the coming years? We think there is a real possibility. How? Consider this, just about a year ago, at the end of October 2023, Netflix stock was trading at around $360 levels and the stock has gained over 95% and trades at about $710 per share currently. Looking at the valuations, Netflix’s valuation is about 60x based on trailing earnings and about 37x estimated 2024 earnings. Is this pricey? Not really, considering the company’s heady earnings growth and its deft strategy, which helped it navigate a brief subscriber decline post-Covid-19 while doubling down on initiatives such as paid sharing and ad-supported plans.

That being said, Netflix’s stock performance has been anything but smooth over the last four years, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 11% in 2021, -51% in 2022, and 65% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. In the scenario below, we use Netflix revenues, profit margins, and valuation multiples to demonstrate a potential path to a $1,000-plus stock price.

Price Increases, Ad Plans Will Drive Revenue Growth 

Netflix revenues have expanded from levels of about $20.2 billion in 2019 to $33.7 billion in 2023, translating into a growth of about 14% annually and the momentum can hold up. Netflix is likely to see sales expand by about 15% this year to close to $39 billion. However, if Netflix grows its sales at an average annual rate of close to 20% for the next two years, sales could rise by almost 45% over the next two years.

There are a couple of ways that Netflix could boost its revenue growth rates.  Netflix’s ad-supported tier is enabling it to attract more price-sensitive customers with a price of just $7 per month in the U.S. This tier had a total of 40 million users as of mid-May 2024, up from about 23 million in January and Netflix has indicated that the ad-supported services represented about 40% of all its signups in the last quarter in markets where they are offered. The upside from ad-supported plans could be better still in developing markets, which Netflix has yet to penetrate and it could drive further growth.

Moreover, despite the lower costs to the customer, the ad-supported plan is expected to generate more revenue per user than some of Netflix’s ad-free plans as incremental advertising revenue more than offsets the discount offered on the ad tier. Separately, Netflix has been hiking prices for its plans continuously in the U.S. and other developed markets. For perspective, the price of the Premium plan stood at $14 per month as of 2019 and rose steadily to $23 currently, following a series of price hikes, including a 15% hike last year.

Further hikes are expected in 2025. Netflix could do something similar in international markets – where prices are often much lower than in the U.S. as it grows more confident about its value proposition. Separately, Netflix’s crackdown on password sharing is also likely to help it drive up its subscriber numbers to an extent.

Strong Unit Economics Will Drive Margin Expansion

Netflix is increasingly focused on boosting its margins, driven by economies of scale. Its net income margins, which stood at 9% in 2019, are guided to reach almost 23% in Q3 2024, as revenue growth outpaces operating costs. We think it’s possible that net margins could grow to around 30% in the next two years.

A key advantage for Netflix is that its content costs are largely fixed, whether from in-house productions or licensing deals. As the company grows its subscriber base, these fixed costs are spread over more users, making content spending more efficient and allowing for a disproportionate boost to margins.  Netflix’s push into advertising could also enhance its margins. The company’s in-house ad tech platform, which is expected to go live in 2025, could also make its advertising more efficient giving customers better insights, while attracting more brands, further boosting profitability.

Netflix also has more room to raise its prices. While the company has boosted prices on its premium plan, it hasn’t increased the cost of its standard tier or ad-supported plan since early 2022. Combining about 45% revenue growth over the next two years, with a margin expansion to about 700 basis points from 23% this year to 30% by FY’26 (or up 30%), this would translate into net profit growth of almost 90%.

Netflix Valuation

Now, if earnings grow by  1.9x, the PE multiple will shrink by a similar level assuming the stock price stays the same. But that’s exactly what Netflix investors are betting will not happen. If earnings expand 1.9x over the next few years, instead of the PE shrinking from a figure around 37x presently to about 20x, a scenario where the PE metric stays at about 30x looks more likely. Why is that?

Stronger growth and expanding margins will likely give investors more confidence about Netflix’s future, translating into a smaller contraction in its multiple. This effectively means that an earnings expansion of 1.9x, with a multiple contraction to 0.8x current levels would translate into a stock price appreciation of about 1.5x. This would make the growth of Netflix stock to levels of about $1,050 within the next few years a real possibility.

What about the time horizon for this high-return scenario? While our above example illustrates a roughly two-year time frame, in practice, it won’t make much difference whether it takes two years or three, as long as Netflix is on this revenue expansion trajectory, with margins holding up, the stock price could respond similarly.

[1] Returns as of 10/15/2024
[2] Cumulative total returns since the end of 2016

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