Netflix (NFLX) stock has been on a remarkable run, finishing Friday's trading session 11% higher and reaching a fresh record above 0. This surge came after the streaming giant beat third-quarter earnings per share (EPS) and revenue estimates, and projected sales for the current quarter that exceeded Wall Street's expectations.
Unlocking the Next Phase of Growth
Beating Expectations and Eyeing Expansion
Netflix's third-quarter revenue beat Bloomberg consensus estimates of .78 billion, hitting .83 billion, a 15% increase compared to the same period last year. This growth was driven by the company's continued focus on revenue initiatives, including its crackdown on password sharing and the introduction of an ad-supported tier, as well as last year's price hikes on certain subscription plans.Looking ahead, Netflix guided to fourth-quarter revenue of .13 billion, surpassing consensus estimates of .01 billion. For the full year 2025, the company sees revenue hitting between billion and billion, compared to consensus estimates of .4 billion. This would represent growth of 11% to 13% from the company's expected 2024 revenue guidance of .9 billion.
Margin Expansion and Earnings Boost
Netflix's full-year operating margins are expected to reach 27%, an increase from the previous 26%, after the metric hit nearly 30% in the third quarter. Diluted earnings per share (EPS) also beat estimates in the quarter, with the company reporting EPS of .40, above consensus expectations of .16 and well ahead of the .73 EPS figure it reported in the year-ago period. Netflix guided to fourth-quarter EPS of .23, ahead of consensus calls for .90.
Subscriber Growth Momentum
Subscriber additions remained strong, with Netflix adding over 5 million subscribers on the heels of breakout programming like "The Perfect Couple" and "Nobody Wants This." Subscriber additions of 5.07 million beat expectations of 4.5 million and follows the 8.05 million net additions the streamer added in the second quarter. The company had added 8.8 million paying users in Q3 2023.Looking ahead, the company expects paid net additions to be higher in the fourth quarter than in the third quarter of 2024 due to normal seasonality and a strong content slate, including the highly anticipated "Squid Game" Season 2, the Jake Paul vs. Mike Tyson fight, and two NFL games on Christmas Day.
Diversifying Revenue Streams
Investors have praised the company's foray into sports and live events, which are seen as a way to diversify its revenue streams and attract new subscribers. Meanwhile, its ad-supported tier continues to gain traction, accounting for over 50% of sign-ups in the countries where it's offered during the third quarter.Netflix stated that it "continues to build our advertising business and improve our offering for advertisers." The company revealed that its ad membership was up 35% quarter-on-quarter, and its ad tech platform is on track to launch in Canada in the fourth quarter and more broadly in 2025.Last quarter, Netflix secured "a 150% plus increase in upfront ad sales commitments over 2023." The company has previously stated its goal is to make ads "a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyond." While the company acknowledges that ads won't be a primary driver of revenue next year as it scales the audience and inventory faster than its ability to monetize it, it sees an "opportunity to close that gap."
Pricing Power and Potential Price Hikes
Leading up to the results, Netflix's stock had been on a tear, with shares up around 45% since the start of the year and trading near all-time highs. Analysts expect another price hike by the end of the year, which will likely serve as yet another catalyst for shares.The company recently revealed that subscribers watched over 94 billion hours on the platform from January to June as part of its latest biannual viewership report, although year-over-year engagement levels came in roughly flat – a potential headwind when it comes to pricing power, which has become especially important for streaming companies as consumers become more picky.On average, US consumers subscribe to four streaming services and spend about per month, according to the latest Digital Media Trends report from Deloitte. Retaining loyal subscribers over time is a challenge due to consumers churning out of, or canceling, their subscription plans.Netflix last raised the price of its Standard plan in January 2022, upping the monthly cost to .49 from .99. It also raised the price of its Premium tier by to .99 a month at the same time; the company again raised the cost of that plan last October to .99. The company has yet to raise the price of its ad-supported offering, introduced less than two years ago, which remains one of the cheapest ad plans among all of the major streaming players at .99 a month.Citi analyst Jason Bazinet said, "Given Netflix's low cost per viewed hour, we see scope for the firm to raise US prices by 12% in 2025." The company recently phased out its lowest-priced ad-free streaming plan, making the .49 Standard plan its cheapest offering for an ad-free experience.
