The Tech Titan on the Rise to the $1 Trillion Club

Consistently strong growth and incremental opportunities are setting the stage for a tech giant to soar to new heights.

In recent years, one of the most significant trends propelling growth in the tech sector has been the rise of artificial intelligence (AI). AI technology gained substantial attention last year, contributing to a surge in interest among investors. The prestigious $1 trillion club is now filled with companies that have embraced this transformative technology.

For instance, Apple has integrated AI into its products, such as Siri and Maps, enhancing user experiences. Other industry leaders like Microsoft, Alphabet, Amazon, and Meta Platforms have built robust business models by embedding AI deeply within their operations. Companies like Nvidia and Taiwan Semiconductor Manufacturing are crucial as they create the chips that power AI.

Netflix (NFLX 11.09%) has been a trailblazer in using AI, particularly in its streaming recommendations and content creation. Even though some investors have shifted their focus to new trends, Netflix has proven its resilience, achieving another quarter of double-digit growth. With a current market cap of around $324 billion, some may find it surprising to consider Netflix as a candidate for the trillion-dollar club; however, its stock has appreciated over 100% in the past year and a staggering 1,380% over the last decade, indicating that its upward trajectory might just continue.

Strong Performance Indicators

Netflix recently announced impressive third-quarter results, exceeding expectations across key metrics. The company reported revenue of $9.83 billion, reflecting a year-over-year increase of 15%, alongside earnings per share (EPS) of $5.40, which showed a remarkable rise of 45%. The growth in revenue was driven by a surge in paid subscribers, adding over 5 million new users—a 14% increase. Netflix’s operating margin surged significantly, climbing 720 basis points to 29.6%.

To provide context, analysts projected a revenue of $9.77 billion with an EPS of $5.12 while expecting 4.5 million new subscribers, which means Netflix outperformed predictions across the board.

Management's outlook is optimistic, with guidance pointing toward fourth-quarter revenue of $10.1 billion, marking a near 15% rise, while projected EPS is $4.23, indicating a substantial increase.

Growth Opportunities Ahead

During the conference call discussing the impressive results, Netflix shared its vision for continued expansion, highlighting three pivotal growth opportunities.

Netflix's ventures into video gaming are beginning to gain traction, especially as audience interest grows around games based on the company's intellectual properties. Management is keenly looking forward to the success of a game inspired by its hit series, Squid Game.

Additionally, the company is fortifying its recent endeavors in live events. Upcoming live-streamed events include a boxing match between Mike Tyson and Jake Paul on November 15, plus exclusive rights to two NFL games on Christmas Day, featuring the winning Kansas City Chiefs facing the Pittsburgh Steelers, and the Baltimore Ravens matched against the Houston Texans. Furthermore, starting in January 2025, Netflix will air weekly episodes of WWE Raw.

However, the most significant opportunity lies in Netflix's expanding digital advertising sector. The company revealed that its audience and advertising inventory are currently growing faster than its ability to capitalize on this momentum. The new ad-supported plan has seen a 35% increase in subscriptions quarter over quarter, making up 50% of new sign-ups where ads are available.

Netflix is launching its first-party ad server in Canada this quarter, with plans to roll it out to other advertising markets by 2025. Partnerships with The Trade Desk aim to broaden advertising capabilities. According to management, ad-tier subscribers exhibit viewing habits similar to standard members, reinforcing the consistency in audience engagement. They project ad revenue will double by 2025.

All of these initiatives reveal how Netflix plans to maintain its strong growth trajectory.

Aiming for the Trillion-Dollar Market Cap

With a market cap of approximately $323 billion, Netflix needs its stock price to rise about 207% to achieve a $1 trillion valuation. However, there is a clear growth pathway in sight for the coming decade. Wall Street analysts estimate Netflix will generate revenue of about $38.74 billion in 2024, leading to a forward price-to-sales (P/S) ratio close to 8. To reach a $1 trillion market cap while maintaining the same P/S ratio, Netflix would need to increase its revenue to approximately $357 billion annually.

Current forecasts suggest Netflix could achieve an annual revenue growth of around 26% over the next five years. If this target is met, Netflix could potentially reach a $1 trillion market cap by 2035. Notably, Netflix has previously grown its yearly revenue by an impressive 562% over the last decade and witnessed a net income surge of 1,450%, indicating that these projections may be conservative. The capability of Netflix to often exceed Wall Street's forecasts further supports the possibility of an accelerated timeline.

Lastly, while Netflix trades at around 39 times earnings, which might initially seem high, analysts expect the company to report EPS of $23.11 in 2025, resulting in a multiple of 30, akin to the S&P 500 standards. Given Netflix's substantial growth history and immense opportunities ahead, this price point might be justified for a company anticipated to sustain robust double-digit growth over the next five years.

growth, technology, Netflix