The Next Generation of Tech Giants: Why Netflix is Poised to Join the Elite
A Secular Tailwind Like No Other
Artificial intelligence (AI) has revolutionized the tech industry, and companies at the forefront of this innovation are reaping the rewards. The likes of Apple, Microsoft, Alphabet, and Meta Platforms have harnessed AI to create seemingly impenetrable moats in their respective businesses. Meanwhile, Nvidia and Taiwan Semiconductor Manufacturing have developed the chips that make AI possible.
Netflix: The Underrated Giant
One pioneer of AI, Netflix, has fallen out of favor with some investors, who are busy chasing the latest trends. However, the company has just delivered another quarter of double-digit growth, with a market cap of $324 billion. Its stock has gained over 100% in the past year and a staggering 1,380% over the past decade.
Beating Expectations
Netflix’s third-quarter results exceeded expectations on every important metric. Revenue soared 15% year over year to $9.83 billion, generating robust profit growth as earnings per share (EPS) jumped 45% to $5.40. Paid subscriber growth surged by over 5 million, an increase of 14%, while the operating margin expanded by an incredible 720 basis points to 29.6%.
A Growth Streak That Will Continue
Management expects this growth streak to persist, guiding for fourth-quarter revenue of $10.1 billion, up nearly 15%, and EPS of $4.23, which would more than double. On the conference call, Netflix highlighted three significant opportunities to drive future growth: video games, live events, and digital advertising.
Gaming the System
Netflix is seeing greater interest in its video games based on its growing library of intellectual property. The company is particularly excited about the title based on Squid Game, its most-watched series.
Live Events and WWE Raw
Netflix is also leaning into its recent successes with live events, including a boxing match between Mike Tyson and Jake Paul, and exclusive rights to two NFL games on Christmas Day. Additionally, the company has secured the rights to WWE Raw, a highly rated wrestling entertainment show, with weekly episodes beginning in January 2025.
Advertising Goldmine
Netflix’s growing digital advertising business presents its biggest opportunity. The company noted that its audience and ad inventory are currently growing faster than its ability to capitalize on that growth. Members signing up for the lowest-priced ad tier increased 35% quarter over quarter and accounted for 50% of new members in countries where Netflix shows advertising.
A Clear Path to $1 Trillion
With a market cap of $323 billion, Netflix would need stock price gains of roughly 207% to drive its value to $1 trillion. However, considering its strong track record of growth and significant opportunities, this goal seems achievable. Wall Street expects Netflix to generate revenue of $38.74 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 8. Assuming its P/S remains constant, Netflix would need to grow its revenue to roughly $357 billion annually to support a $1 trillion market cap. With a habit of outpacing Wall Street’s expectations, Netflix could achieve this milestone as soon as 2035.
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