After A Solid 2024, What’s In Store For Netflix Stock?

Netflix (NASDAQ:NFLX) stock has had a solid year, rising by almost 90% year-to-date, trading at about $920 per share currently. This compares to rival Disney (NYSE:DIS), which has gained about 26% over the same period. Growth has been driven by Netflix’s crackdown on password sharing and the expansion of its advertising-supported streaming plan. These moves have helped the company boost subscriber adds, with over 22 million users signing up over the first nine months of the year, bringing its user base to about 283 million subscribers.  So what does 2025 hold for Netflix stock?

Slower Subscriber Growth?

Netflix’s growth in 2024 was driven by its measures to curb password sharing, which required users to either pay for additional sharing options or create new accounts. This initiative has now been rolled out across 100+ countries helping Netflix sign on more subscribers, or better monetize existing users. Similarly, the ad-supported tier, which offers a more affordable entry point for users, has seen strong adoption, with over half of new subscribers in eligible regions opting for this plan as of the most recent quarter. That being said, with the password-sharing crackdown and ad-supported plans now largely rolled out in key markets, Netflix may have limited avenues for significant subscriber growth in the near term. These initiatives quite likely pulled forward demand from future years, and this could mean that 2025 could see somewhat muted subscriber growth from Netflix.  The company’s decision to stop reporting subscriber numbers starting in 2025 could be a sign that the company expects growth to plateau. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Are Price Hikes In The Cards?  

Netflix recently raised pricing on its Basic and Premium plans by $2 per month and $3 per month, respectively. However, Netflix’s lowest-priced ad-supported plan and its Standard full-HD plan, which are likely two of the company’s most popular options, remained at $7 and $15.50 per month, respectively.  In fact, the last time Netflix increased prices on its full-HD plan was in January 2022, meaning it’s almost three years now. This could mean that a price hike may be around the corner in 2025 for these two plan options as Netflix looks to offset higher content spending. Moreover, with users now used to Netflix’s other big changes that Netflix has carried out, such as paid sharing, the company could potentially raise prices without much pushback from customers. That being said, the competition is mounting and this could reduce the magnitude of Netflix’s potential price hikes.  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.

How Will Margins Trend?

Netflix’s margins have expanded significantly, standing at about 30% in Q3 2024, up from about 22% in the year-ago period driven by higher per-user revenues, led by price hikes and the ad-supported plans,  besides a moderation in content investments last year through the writers’ strike. Margins could hold up in 2025 as Netflix continues to expand its revenue base. However, there are some concerns as well. Content costs are set to rise as Netflix forays into live sports programming, such as NFL games and WWE wrestling. Additionally, rising competition could lead to higher churn rates or a slowdown in new sign-ups and this could also reflect on margins to an extent. 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. So is Netflix stock attractive at current levels?

Valuation Concerns

At the current stock price of almost $920 per share, Netflix trades at around 40x consensus 2025 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 eventually stabilize.  We value Netflix stock at about $613 per share, about 33% below the market price. See our analysis of Netflix valuation: Expensive or Cheap?

[1] Returns as of 12/17/2024
[2] Cumulative total returns since the end of 2016

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