Netflix Inc. (NFLX) shares soared to unprecedented levels after the streaming giant added over 5 million new subscribers in the third quarter of 2024, surpassing Wall Street’s projections.
Revenue for the quarter surged by 15%, reaching $9.83 billion, while earnings per share climbed to $5.40. This significant growth propelled Netflix’s stock to an intraday high of $761.22, marking its largest gain since January.
These numbers underscore the success of Netflix’s strategy, which includes a crackdown on password sharing and the introduction of a lower-priced, ad-supported subscription. As a result, the company now boasts 282.7 million subscribers worldwide, a notable rebound from the slowdown in growth it faced in May 2022. However, analysts are cautioning that this recent surge may be fleeting.Ad-Supported Growth Shows Potential, but Long-Term Challenges Remain
While Netflix's subscriber growth outpaced expectations, the company is now grappling with how to sustain this momentum. A significant portion of the recent boost is attributed to temporary factors, such as the password-sharing crackdown. The company’s advertising-supported tier has shown promise, with ad membership growing by 35% quarter-over-quarter, and representing more than 50% of sign-ups in the 12 countries where it has launched.
Despite these early successes, Netflix's advertising segment has yet to make a substantial financial impact. Co-CEO Greg Peters emphasized that the company is building its own advertising technology, and expects ad sales to double next year. Still, analysts worry that Netflix's reliance on subscriber growth may falter as the company pivots toward new revenue streams like advertising and live programming.
Price Increases and Global Expansion Bolster Revenue Prospects
Netflix has also implemented price increases in regions like Spain and Italy, while phasing out cheaper subscription tiers in countries such as Brazil. These moves are part of a broader effort to increase revenue through higher membership fees, with projections suggesting the company’s sales could grow between 11% and 13% next year. However, the company has been cautious about raising prices in the U.S., preferring to focus on offering a variety of plan options to retain customer loyalty.
Despite some subscriber loss in Latin America, Netflix's leadership remains optimistic. The company expects new subscribers in the fourth quarter to exceed the third quarter’s total, driven by a strong content slate that includes new seasons of Squid Game and Emily in Paris. However, this confidence is tempered by potential challenges in maintaining its dominant market position as rivals like Disney+ (DIS) and Amazon Prime (AMZN) continue to expand.
Profitability and Content Investment: A Delicate Balance
While Netflix has quadrupled its net income over the past five years, future profitability may be tempered by increased spending on advertising and new content. The company is investing heavily in live programming, including NFL games and WWE wrestling, to diversify its offerings and attract more advertisers. However, these investments may slow the company’s operating margin growth, which is expected to increase by just one percentage point to 28% in 2025.
Overall, Netflix’s financial outlook remains strong, with projected revenues of up to $44 billion next year. Yet the company faces mounting pressure to demonstrate that its foray into advertising and live content can sustain long-term growth, while navigating a competitive landscape and rising operational costs.
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