One in all the largest secular tailwinds lately is the arrival of artificial intelligence (AI). The most recent advancements in AI went viral early last yr, and the list of firms within the $1 trillion club is plagued by businesses on the vanguard of this next-generation technology.
For instance, Apple products — including Siri and Maps — have all the time embraced AI, while Microsoft, Alphabet, Amazon, and Meta Platforms have developed seemingly impenetrable moats by integrating AI deeply into their respective business operations. Nvidia and Taiwan Semiconductor Manufacturing have developed the chips that make AI possible.
Netflix (NASDAQ: NFLX) is considered one of the pioneers of AI, using cutting-edge algorithms to tell its streaming recommendations and production decisions, yet the corporate has fallen out of favor with some who’re busy chasing the newest shiny recent thing. Investors could be surprised to learn that Netflix just delivered one other quarter of double-digit growth. With a market cap of just $324 billion, it might sound premature to suggest Netflix is bucking to affix its peers within the trillion-dollar club, yet the stock has gained greater than 100% over the past yr and 1,380% over the past decade, and the evidence suggests its ascent will proceed.
Bullish results
Netflix just reported its third-quarter results and sailed past expectations on every essential metric. Revenue of $9.83 billion climbed 15% yr over yr, generating robust profit growth as earnings per share (EPS) of $5.40 soared 45%. Revenue was fueled by strong paid subscriber growth that jumped by greater than 5 million, a rise of 14%. The underside line was driven higher by an expanding operating margin that increased by an incredible 720 basis points to 29.6%.
For context, analysts’ consensus estimates were calling for revenue of $9.77 billion and EPS of $5.12, accompanied by subscriber additions of 4.5 million, so Netflix beat across the board.
Perhaps more importantly, management expects its growth streak to proceed. Netflix is guiding for fourth-quarter revenue of $10.1 billion, up nearly 15%, while EPS of $4.23 would greater than double.
Incremental levers for growth
On the conference call to debate the outcomes, Netflix laid out plans to proceed its impressive growth, highlighting three particularly significant opportunities.
Netflix has been dabbling in video games for a while now, but the corporate is starting to see greater interest from its audience for the games based on the corporate’s growing library of mental property. Management is especially excited concerning the title based on Squid Game, the corporate’s most-watched series.
Management can also be leaning into its recent successes with live events. Netflix is live-streaming a boxing match between Mike Tyson and Jake Paul on Nov. 15. The corporate also has exclusive rights to 2 NFL games on Christmas Day: The Super Bowl LVII-winning Kansas City Chiefs vs. the Pittsburgh Steelers, and the Baltimore Ravens vs. the Houston Texans. Finally, Netflix is the brand new home of WWE Raw, the highly rated wrestling entertainment show, with weekly episodes starting in January 2025.
Nevertheless, the corporate’s biggest opportunity is its growing digital promoting business. Netflix noted in the course of the call that its audience and ad inventory are currently growing faster than the corporate’s 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 recent members within the countries where Netflix shows promoting.
The corporate has a few essential initiatives which are designed to speed up its ads business. First, Netflix is launching its first-party ad server, starting in Canada this quarter, then in the remainder of its promoting markets in 2025. The corporate can also be leaning into its partnership with The Trade Desk to expand its promoting reach. Netflix noted that ad-tier members are much like other subscribers when it comes to hours watched and preferred titles, which shows viewing patterns are consistent. Management expects ad revenue to double (off a small base) in 2025.
Each of those initiatives represents an incremental growth driver, which helps illustrate how Netflix plans to proceed its robust growth.
The trail to $1 trillion
Netflix currently has a market cap of $323 billion, which implies it should take stock price gains of roughly 207% to drive its value to $1 trillion, but there’s a transparent path for growth over the approaching decade. In keeping with Wall Street, Netflix is predicted 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 stays constant, Netflix would should grow its revenue to roughly $357 billion annually to support a $1 trillion market cap.
Wall Street is currently forecasting revenue growth for Netflix of about 26% annually over the following five years. If the corporate achieves that benchmark, it could achieve a $1 trillion market cap as soon as 2035. It’s value noting that Netflix has grown its annual revenue by 562% over the past decade, and its net income has soared 1,450%, so Wall Street’s outlook could well be conservative. Moreover, as this quarter illustrates, Netflix has a habit of outpacing Wall Street’s expectations, which could also shave years off this timeline.
Finally, Netflix is currently selling for roughly 39 times earnings, which might sound expensive at first glance, but consider this: Wall Street expects Netflix to generate EPS of $23.11 in 2025, which might represent a multiple of 30 — similar to the S&P 500. Considering Netflix’s strong track record of growth and its significant opportunity, I’d say that is a good price to pay for a corporation expected to generate consistent double-digit growth over the following five years.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Idiot’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of directors. Danny Vena has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, and The Trade Desk. The Motley Idiot has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Taiwan Semiconductor Manufacturing, and The Trade Desk. The Motley Idiot recommends the next options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.
Meet the Unstoppable Stock That Could Join Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta, and Taiwan Semiconductor Manufacturing within the $1 Trillion Club by 2035 was originally published by The Motley Idiot