Is Netflix Stock a Good Investment Choice?

Netflix, once a standout in the stock market, has faced some challenges recently. While it used to be part of the fast-growing tech group known as FAANG, it now stands apart from the elite tech stocks in the "Magnificent Seven" group. Despite a setback during the pandemic that led to a temporary decline in subscribers and profits, Netflix has successfully adapted to the evolving streaming landscape and is thriving once again. The company introduced an advertising tier, a demand long awaited by investors, offering customers a lower-priced subscription option while providing advertisers access to a vast audience. Additionally, cracking down on password-sharing has not only boosted revenue but also positively impacted the bottom line.

Although Netflix may have lost its position as a market leader, the streaming giant recently achieved another all-time high following its third-quarter earnings report, demonstrating strong performance across various metrics. In the quarter, Netflix added 5.1 million subscribers, totaling 35.6 million over the past four quarters. This surge drove revenue up by 15% to $9.83 billion, surpassing estimates. The company also saw significant growth in operating margin, a key focus for profitability, which increased from 22.4% to 29.6%. As a result, management raised the full-year operating margin forecast from 26% to 27%.

Earnings per share based on generally accepted accounting principles (GAAP) rose to $5.40 from $3.73 in the previous year’s quarter, surpassing the consensus forecast of $5.16. Netflix provided a positive outlook for the fourth quarter, projecting revenue growth of 14.7% and earnings per share of $4.23, both exceeding analyst expectations.

Despite the impressive results, concerns have been raised about the sustainability of growth driven by the crackdown on password-sharing, as subscriber additions, while solid at 5 million, were the slowest in the last five quarters.

Looking ahead, Netflix remains optimistic about its ability to increase margins in the long term. The company’s current operating margin of 27% is commendable, but there is still significant potential for further expansion as its subscription model scales. Additionally, the company’s advertising business is gaining traction, with a 35% increase in membership in the ads plan quarter over quarter. Offering advertising not only diversifies revenue streams but also provides flexibility in programming, as seen in Netflix’s recent forays into live sports streaming.

As Netflix continues to innovate and expand its offerings, there is room for the stock to rise further as the business scales and margins grow. The company’s global entertainment model has proven successful, providing it with a competitive edge in the ever-evolving streaming industry.