Netflix has had a successful year, with its stock rising nearly 40% year-to-date, outperforming rival Disney. The company has implemented various strategies to drive growth, including cracking down on password sharing and expanding its ad-supported streaming offering. The ad-supported tier has gained traction, attracting more price-sensitive customers with its $7 per month price point in the U.S. This tier now has 40 million users, up from 23 million in January. Netflix is looking to enhance engagement by rewarding binge watchers with an ad-free episode after watching three episodes in a row. The company is also investing in advertising technology and plans to introduce its own in-house platform by the end of next year. Netflix’s push into live sports streaming could also be driven by the need to grow its advertising business.
The success of Netflix’s ad-supported plans has helped the company revive its growth rates following a post-Covid lull. NFLX stock has shown strong gains, rising 25% from early 2021 to around $670. However, the stock’s performance has been inconsistent, with returns of 11% in 2021, -51% in 2022, and 65% in 2023 compared to the S&P 500. The Trefis High Quality Portfolio, with 30 stocks, has consistently outperformed the S&P 500 each year over the same period. As the macroeconomic environment remains uncertain, Netflix may face challenges in outperforming the market over the next 12 months.
While Netflix’s recent performance has been strong, concerns remain about its valuation. At a market price of $670 per share, Netflix trades at roughly 40x forward earnings, which some consider expensive. Consumer spending growth has slowed down, and the unemployment rate in the U.S. has seen an uptick, which could impact companies like Netflix that rely on strong consumer confidence. Subscriber growth may also cool down as the impact of subscriber ads stabilizes from the password-sharing crackdown and ad-supported tiers. Analysts have set a price estimate of $528 for Netflix, which is about 21% below the market price, citing concerns about its valuation and revenue trends.
Overall, Netflix’s ad-supported strategy has been instrumental in driving growth and attracting price-sensitive customers. The company’s stock has shown strong gains, but concerns about valuation and macroeconomic factors may impact its performance in the future. Investors will be watching closely to see how Netflix continues to navigate the evolving streaming landscape and whether its ad-supported plans can sustain its growth trajectory.
