Netflix (NFLX 2.51%) is the world's largest streaming platform for movies and television shows. According to the company's earnings report for the first quarter of 2024, it extended its lead at the top of the industry as its subscriber base grew to a new record high.
Unfortunately, investors sent Netflix stock plunging 9% immediately following the release of its Q1 results. They appeared to take issue with management's decision to cease reporting subscriber figures beginning in 2025. Broader stock market conditions didn't help, because the Nasdaq-100 technology index sank 6% last week, exacerbating Netflix's decline.
Despite this seemingly gloomy backdrop, there are three reasons investors should take this opportunity to pounce on the stock.
Image source: Netflix.
1. Subscriber growth continues to accelerate
Netflix added 37.1 million subscribers during Q1 compared to the year-ago period, taking its total to 269.6 million. That was good for a 16% increase, which was more than 3 times faster than the growth the company delivered in Q1 of 2023, and it marked the fifth straight quarter of acceleration.
Two initiatives are responsible for the strong result. First, Netflix continues to crack down on password-sharing to monetize the estimated 100 million global households "borrowing" their subscription for free from a friend or family member. Second, the company is experiencing substantial growth from its new, cheaper advertising tier, which allows consumers to subscribe to Netflix for a reduced price in exchange for viewing ads during programming. (I'll discuss that in more detail in a moment.)
The accelerated subscriber additions led to a record $9.3 billion in revenue for the quarter, which was a 14.8% year-over-year boost. That also marked the fifth consecutive quarter of faster gains, and management's guidance suggests revenue could increase by an even more rapid 15.9% in the upcoming Q2.
Netflix also managed its costs very carefully during the first quarter, with operating expenses climbing by just 7.1% year over year. That allowed more money to flow to the bottom line, leading to an impressive 83.3% surge in earnings per share to $5.28.
2. Advertising is a substantial long-term opportunity for Netflix
The Netflix ad-tier plan is priced at $6.99 per month, which is a significant discount to the standard plan ($15.49 per month) and the premium plan ($22.99 per month). In countries where the ad tier is available, it accounted for over 40% of all new sign-ups during Q1.
Ad-tier sign-ups also grew by 65% compared to just three months earlier, which highlights how popular it has become with customers. It appears Netflix's plan to target consumers at the lower end of the income spectrum is an incredible success so far.
Investors might feel ad-tier sign-ups are a negative for the company because of the lower price point, but management has previously said they monetize at a similar rate to the $15.49 standard tier. In effect, advertising dollars are making up for the difference in price.
According to Statista, advertisers will spend $147.9 billion reaching audiences through traditional TV in 2024. Streaming represents around 38.5% of total TV viewing time in the U.S. at the moment, and it's steadily growing. Therefore, much of the ad spending with traditional media providers could eventually flow to platforms like Netflix as they grow their audiences, which is a huge financial opportunity.
3. Netflix still represents less than 10% of TV viewing worldwide
Netflix currently accounts for just 8.1% of TV viewing time globally, and its share is less than 10% in every individual market. So it still has a small market share not only as a portion of overall TV time, but also in the streaming industry itself (despite being the largest player).
Netflix's 269.6 million subscribers places the platform comfortably ahead of Walt Disney's Disney+ streaming service, which comes in second place with 149.9 million. However, Netflix says there are more than 500 million smart TV households in its addressable market, so there is still a long runway for growth.
Financially speaking, the company believes its addressable opportunity is worth more than $600 billion across TV, movies, gaming, and branded advertising. Its strategy is to continue investing heavily in content to attract new subscribers, and it will spend around $17 billion on its slate this year, including a deeper dive into live sports programming.
Netflix will stream the Jake Paul vs. Mike Tyson boxing match in June, and the platform will also become the home of World Wrestling Entertainment (WWE) starting in 2025. The latter program will feature regular live events. The WWE deal with parent company TKO Group is rumored to be worth $5 billion over 10 years, and it could expand Netflix's audience thanks to the sport's dedicated and engaged fanbase.
The stock looks like an attractive bet for the long term
As I touched on at the top, Netflix stock sank 9% following the release of its strong Q1 results. The company told investors it will stop reporting its subscriber figures from 2025 onward, and that can be interpreted as a sign that sluggish growth is on the horizon. However, management said the total subscriber number isn't important anymore because the platform has so many subscription options with different prices, which means translating subscriber growth into revenue growth is no longer straightforward.
Instead, Netflix will begin offering full-year revenue guidance and additional clarity on operating income, profit margins, and earnings to give investors as much valuable information as possible.
As a result, the dip in Netflix stock might have created a buying opportunity. Based on the company's trailing-12-month earnings per share of $14.41 and its current stock price of $555, it trades at a price-to-earnings (P/E) ratio of 38.5. However, based on Wall Street's earnings forecasts for 2024 and 2025, its P/E ratio falls to 34.2 and 27.7, respectively, on a forward basis.
The Nasdaq-100 sports a P/E ratio of 29.7 today, so Netflix stock will have to rise between now and the end of 2025 to keep pace with the valuation of the broader tech sector. However, Netflix tends to command a premium because of its dominant position in the streaming industry, its enormous addressable market, and the fact it's the only pure-play streaming service generating a profit.
Therefore, investors might want to buy the recent dip.
