Up 70% This Year, Is Netflix Stock Worth The Risk?

Netflix (NASDAQ:NFLX) stock has had a solid year, rising by almost 72% in year-to-date trading. The company successfully navigated a brief subscriber decline post-Covid-19. The stock now trades at almost $840 per share led by the company’s solid execution on two fronts, namely its crackdown on password sharing and the expansion of its advertising-supported streaming option. This compares to rival Disney (NYSE:DIS), which has gained a mere 5% over the same period. However, with the stock trading at all-time highs, is it too risky? See our Netflix downside scenario Netflix Stock Downside Scenario: $400

Netflix stock has seen considerable volatility in the past. 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.

Much of Netflix’s growth in recent quarters has come via strong subscriber growth, with the company adding over 50 million subscribers between early January 2023 and September 2024, bringing its user base to about 283 million. Netflix began putting restrictions on password sharing last year, which required people using someone else’s account to create their own accounts or sign up for paid sharing of accounts ($8 per month for add-on subscribers) to continue using Netflix. While this crackdown on account sharing boosted subscriber numbers, the impact may be short-lived. With the policy now enforced in over 100 countries, there may be limited growth potential from this avenue.

The same concern might hold for Netflix’s ad-supported plans, too. According to Netflix, more than half of new subscribers in countries that offer its ad-subsidized plans are opting for the ad tier, but this initial surge could slow future growth. We wouldn’t be surprised if paid sharing and ad-supported plans pulled forward potential subscribers from outer years, dampening future growth. Netflix’s paid net additions have been slowing down recently. Paid additions in the U.S. and Canada stood at 0.69 million in Q3 2024, down from 2.5 million in Q1 and about 1.5 million in Q2. Netflix’s decision to stop reporting subscriber numbers starting from 2025 could also be an indicator that the company sees slower subscriber growth going forward.

Netflix’s ARPU growth could also slow going forward. Netflix has already raised prices several times in recent years, with its most popular ad-free plan rising from $10 in 2017 to $15.50 today. While Netflix has skillfully monetized users without increasing churn driven by its strong content slate, and recently added advertising revenue streams, the competition is mounting. For example, Disney’s streaming bundles, offering Disney Plus, Hulu, and ESPN Plus for as low as $15 per month, appear to provide stronger value. Sure the streaming market isn’t a zero-sum game with many users subscribing to multiple services, but rising economic pressures could drive higher cancellations or make subscribers hop between services by month.

More niche streaming services are also seeing a lot of traction, with services focused on more tailored programming, such as British TV, feel-good movies, and anime as the major streaming services cater to much broader audiences. The increasingly competitive environment, along with a challenging economic outlook and pressure on consumers, gives Netflix less room to raise prices going forward. Netflix has also refrained from raising the price of its standard full-HD plan since its last increase in January 2022, suggesting a relatively cautious approach to pricing.

Netflix’s margins growth could also cool. While net margins have also expanded over recent years, growing from 9% in 2019 to around 22% in 2023, rising content costs, including its push into live sports programming such as NFL games and WWE wrestling, could start to erode those gains. Content spending, which dropped temporarily during the 2023 strikes by writers and actors, is also expected to pick up again in 2024, with Netflix planning to spend around $17 billion on content. If growth slows and costs rise, net margins could contract, possibly pushing Netflix’s profit growth into a lower gear. While Netflix may see margins cool, EV and renewables behemoth Tesla could see better times, considering Elon Musk’s friendship with President Trump. Here’s How Telsa Benefits From Trump.

At the current stock price of almost $840 per share, Netflix trades at around 42x expected 2024 earnings, which appears expensive in our view. In comparison, the stock was trading at about 20x earnings back in mid-2022.  Although Netflix’s recent performance has been strong, markets tend to be short-sighted, extrapolating short-term successes for the long run. In Netflix’s case, the assumption is likely that the company will continue its strong streak of subscriber additions and likely grow revenues comfortably at double digits. However, there’s a real possibility that Netflix will soon see subscriber growth cool, as the twin benefit of the password-sharing crackdown and ad-supported tiers is likely to eventually stabilize. In the event of such a scenario, Netflix stock could face a steep decline from its current highs, making it a potentially risky investment. We value Netflix stock at about $613 per share, about 25% below the market price. See our analysis of Netflix valuation: Expensive or Cheap?

[1] Returns as of 11/15/2024
[2] Cumulative total returns since the end of 2016

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