Meet the Stock Poised to Join the $1 Trillion Club

Consistent strong growth and new opportunities could elevate this tech giant to unprecedented levels.

In recent years, one of the most significant trends has been the rise of artificial intelligence (AI). The advancements in AI have captivated attention since early last year, and many of the companies that comprise the $1 trillion club are at the forefront of this transformative technology.

Apple has integrated AI into its products, such as Siri and Maps, while Microsoft, Alphabet, Amazon, and Meta Platforms have fortified their positions by deeply embedding AI into their business models. Additionally, Nvidia and Taiwan Semiconductor Manufacturing produce the essential chips that power AI.

Among these influential companies, Netflix (NFLX) has been a trailblazer in employing AI, utilizing advanced algorithms to enhance its streaming recommendations and production decisions. Despite this, the company has faced some loss of favor as investors chase newer trends. However, Netflix has recently reported another quarter of impressive double-digit growth. With a market cap of about $324 billion, it may seem early to predict that Netflix could soon be joining its more established peers in the trillion-dollar club. Yet, the stock has surged over 100% in the past year and has realized a staggering 1,380% increase over the past decade, indicating that its upward trajectory is likely to continue.

Strong Performance Indicators

Netflix’s third-quarter results exceeded expectations across key metrics. The company achieved revenue of $9.83 billion, representing a year-over-year increase of 15%, while earnings per share (EPS) reached $5.40, soaring 45%. This growth was driven by a substantial boost in paid subscriptions, with over 5 million new subscribers added—a 14% rise. The increase in profits was also fueled by a remarkable operating margin improvement, rising 720 basis points to 29.6%.

To put this in perspective, analysts had anticipated revenue of $9.77 billion and an EPS of $5.12, along with 4.5 million new subscribers. Netflix surpassed all these expectations.

Looking ahead, management forecasts continued growth, projecting fourth-quarter revenue of $10.1 billion, a nearly 15% increase, and an EPS of $4.23, which would more than double from the prior year.

New Growth Avenues

During the earnings call discussing these results, Netflix outlined strategic initiatives aimed at sustaining its growth momentum, pinpointing three notable opportunities.

First, Netflix is expanding its presence in video gaming, observing increased interest in games based on its expanding library of original content. Management is particularly enthusiastic about a game adaptation of the hugely popular series Squid Game.

Secondly, Netflix is venturing into live events, including streaming a boxing match between Mike Tyson and Jake Paul on November 15. Additionally, the company has secured exclusive broadcasting rights for two NFL games on Christmas Day: the Kansas City Chiefs versus the Pittsburgh Steelers and the Baltimore Ravens vs. the Houston Texans. Moreover, starting in January 2025, Netflix will also host episodes of WWE Raw, a popular wrestling show.

However, the most significant opportunity lies in its burgeoning digital advertising business. Management noted that both audience engagement and advertising inventory are growing faster than the company's current capacity to leverage this growth. The lowest-priced ad-supported tier saw a 35% increase in new sign-ups last quarter, making up 50% of new subscriptions in markets where ad content is available.

To harness this momentum, Netflix plans to launch its first-party ad server beginning in Canada this quarter, expanding it to other markets in 2025. The company is also strengthening its partnership with The Trade Desk to boost its advertising capabilities. Netflix found that ad-tier subscribers have viewing habits similar to regular members, suggesting consistent engagement. Management anticipates that ad revenue could double (from a still modest base) by 2025.

These initiatives act as incremental sources of growth, clearly demonstrating Netflix's plan to maintain its robust expansion.

Pathway to $1 Trillion Valuation

With a market cap currently at $323 billion, reaching a $1 trillion valuation would necessitate a 207% increase in stock price. However, Netflix has a feasible pathway for growth over the next decade. Consensus estimates project revenue of $38.74 billion in 2024, resulting in a forward price-to-sales (P/S) ratio of about 8. To achieve a $1 trillion valuation while maintaining this P/S ratio, Netflix would need to scale its revenue to approximately $357 billion annually.

Wall Street analysts predict revenue growth of around 26% annually for Netflix over the next five years. If the company meets this target, it could potentially reach a $1 trillion market cap by 2035. Importantly, Netflix has historically expanded its annual revenue by 562% over the last decade, alongside a net income growth of 1,450%. Therefore, Wall Street’s projections might actually be on the conservative side. Moreover, Netflix has a tendency to outperform analysts’ expectations, which could hasten this timeline.

Currently, Netflix trades at around 39 times its earnings, which may initially seem high. However, analysts forecast EPS of $23.11 in 2025, translating to a price-to-earnings (P/E) multiple of 30—similar to that of the S&P 500. Given Netflix’s impressive growth track record and ample opportunities ahead, this is a reasonable valuation for a company anticipated to maintain double-digit growth over the subsequent five years.

Stock, Growth, Technology