The Tech Titan Poised for Trillion-Dollar Status by 2035

The potential for strong growth and new opportunities could elevate this tech giant to remarkable heights.

One of the major driving forces in recent years has been the rise of artificial intelligence (AI). The latest developments in AI became widely recognized early last year, and many companies in the trillion-dollar market are leading the charge in this game-changing technology.

For instance, Apple incorporates AI across its products like Siri and Maps, while Microsoft, Alphabet, Amazon, and Meta Platforms have built robust competitive advantages through deep integration of AI in their business processes. Meanwhile, Nvidia and Taiwan Semiconductor Manufacturing are responsible for the chips that support AI innovation.

Netflix stands out as a pioneer in the AI landscape, utilizing advanced algorithms for content recommendations and production decisions. Despite facing some skepticism from investors chasing newer trends, Netflix has recently posted another remarkable quarter with double-digit growth. Although its market cap is currently at $324 billion, indicating it may be early to consider Netflix for the trillion-dollar club, the stock has surged more than 100% over the last year and an impressive 1,380% over the past decade, suggesting strong prospects ahead.

Bullish Results

Netflix’s latest third-quarter results exceeded expectations across key metrics. The company reported revenue of $9.83 billion, marking a 15% year-over-year increase, and a significant 45% jump in earnings per share (EPS) to $5.40. This revenue growth was driven by a strong increase in paid subscribers, gaining over 5 million, which is up 14%. The company also reported an impressive rise in operating margin, which expanded by 720 basis points to reach 29.6%.

To provide context, analysts had projected revenue of $9.77 billion, an EPS of $5.12, and subscriber growth of 4.5 million, meaning Netflix surpassed all these expectations.

Moreover, Netflix management has provided positive guidance for the next quarter, forecasting revenue to reach $10.1 billion, close to a 15% rise, while expecting EPS of $4.23, more than double the previous period's earnings.

Incremental Growth Levers

During the earnings call, Netflix shared its plans for sustaining impressive growth, highlighting three key areas of opportunity.

First, Netflix has been venturing into video games and is noticing increasing engagement from viewers with games featuring its expanding catalog of original content. The company is particularly enthusiastic about a game inspired by Squid Game, its most popular series.

Second, Netflix has found success with live events, announcing plans to live-stream a boxing match between Mike Tyson and Jake Paul on November 15. Additionally, Netflix will hold exclusive rights for two NFL games on Christmas Day featuring the Super Bowl LVII-winning Kansas City Chiefs against the Pittsburgh Steelers and the Baltimore Ravens vs. the Houston Texans. Furthermore, starting January 2025, Netflix will become the home for WWE Raw, a highly rated wrestling program.

However, the most significant opportunity lies within Netflix's growing digital advertising business. The company pointed out that its audience and ad inventory are expanding at a pace quicker than its ability to monetize that growth. The subscriber base for its most affordable ad-supported tier grew by 35% in just one quarter, making up 50% of all sign-ups in regions where advertisements are displayed.

To capitalize on the advertising boom, Netflix is launching its own ad server, which will start in Canada this quarter before rolling out to other markets in 2025. Additionally, Netflix is strengthening its collaboration with The Trade Desk to broaden its advertising capabilities. Management anticipates advertising revenue could double by 2025, albeit from a smaller base.

Each of these initiatives represents potential growth drivers that highlight Netflix's strategy for sustaining robust growth moving forward.

The Road to $1 Trillion

With a current market cap of $323 billion, Netflix would need to see a 207% increase in stock price to reach the $1 trillion mark, yet a clear pathway for growth exists. According to market analysts, Netflix is expected to produce revenue of $38.74 billion in 2024, which translates to a forward price-to-sales (P/S) ratio of about 8. If Netflix maintains this P/S ratio, it would need to grow its revenue to approximately $357 billion annually to justify a $1 trillion market value.

Market forecasts predict that Netflix will achieve around 26% annual revenue growth over the next five years. If realized, this could position the company to hit a $1 trillion market cap by 2035. Interestingly, Netflix has already increased its annual revenue by 562% over the last ten years, with net income lifting by 1,450%, indicating that market forecasts could be conservative. Additionally, Netflix's history of exceeding analysts' expectations may further hasten this timeline.

Currently, Netflix's stock trades at about 39 times earnings. While this might seem costly, analysts project an EPS of $23.11 for 2025, which would bring its valuation in line with the S&P 500 at a multiple of 30. Considering Netflix's solid growth history and immense potential, this valuation appears reasonable for a firm anticipating continued double-digit growth over the next five years.

growth, investors, advertising