Netflix’s Growth Is Staggering. But Are Shares Still Attractive?

by

This year, Netflix’s (NFLX) stock has significantly outperformed the market. As we speak, the streaming giant’s shares have skyrocketed by more than 38% since the beginning of the year. This stellar performance far surpasses the S&P 500’s return of over 7% for the same period. This positive market reaction is hardly unexpected. The company’s recent growth is underpinned by a variety of strong catalysts and substantial improvements in its operating margin. Key factors propelling the business include member growth, an emerging advertising sector, price hikes, a surge in live events, and the ongoing expansion of mobile gaming. With such powerful drivers, Netflix appears invincible.

Instead of examining the stock right now, isn’t it worthwhile to delve into its second-quarter performance instead? Now that we have fresh figures to analyze, this presents an opportune moment for investors to scrutinize the shares and make informed judgments. Have market participants already incorporated all these promising growth strategies in their valuations? Or is there a chance that the stock could surpass the market’s performance even with current lofty levels?

Growth is accelerating

According to Netflix’s recent second-quarter report, their strategies aimed at expansion are proving successful. The company reported a 15.9% increase in revenue compared to the same quarter last year, which is significantly higher than the 12.5% growth they experienced in Q1. Moreover, the company anticipates even stronger growth in the future, projecting a 17.3% year-over-year revenue increase for the upcoming third quarter.

Moving past just revenue increase, the company’s earnings progression is truly remarkable. In the second quarter, the earnings per share reached an impressive $7.19, marking a 47% rise compared to the same period last year. This substantial growth can be attributed to a significant expansion in operating margin. The operating margin for the second quarter stood at 34.1%, representing a leap from 27.2% during the corresponding quarter last year.

The optimistic revenue forecast by Netflix can be attributed to a weaker U.S. dollar, but it’s primarily driven by the robust performance of the various growth factors supporting their business. This was emphasized by Netflix’s CFO, Spencer Adam Neumann, during their second-quarter conference call. He highlighted that the company is experiencing strong member growth, which even increased significantly towards the end of Q2. Additionally, he mentioned a positive trend in advertising sales.

There’s more where that came from

After a strong beginning to the year, the management has raised its forecast for annual income. The company now anticipates its total 2025 revenue to be between $44.8 billion and $45.2 billion. This is higher than the initial prediction of $43.5 billion to $44.5 billion.

Moreover, Netflix anticipates that its operational efficiency will continue to hold strong. For the entire year, they are projecting an operating profit margin of 29.5%, which represents a rise from 26.7% in the previous year. It’s worth mentioning that prior to releasing their second-quarter results, Netflix had projected a full-year operating profit margin of 29%.

One significant factor boosting Netflix is its advertising revenue. Although Neumann pointed out that this sector remains relatively modest, he mentioned during the earnings call that it’s on track to approximately double this year. Furthermore, he stated that their ad sales are slightly ahead of the projections set at the beginning of the year.

Loading widget...

Netflix stock: Buy, sell, or hold?

Due to Netflix’s current rapid expansion showing no signs of slowing down, it seems their shares are highly valued. And that’s exactly what we see happening – the stock’s price-to-earnings ratio stands at approximately 53 at present.

Is it possible that the current price is excessively high for this stock? It might be wiser for those who don’t currently own the stock to wait for a chance to buy at a lower cost instead. Still, it’s unlikely Netflix will drop to prices considered cheap. However, if the price-to-earnings ratio were 40 or less, it would better represent some of the potential risks involved.

One noteworthy risk to mention is the fierce competition Netflix faces from its heavily funded rivals in the streaming industry. As major tech corporations continue to expand their video streaming offerings, the struggle for compelling content is expected to grow increasingly competitive in the future.

Given that the stock’s share price is over 50 times its earnings, it could be considered appropriate to advise keeping it in one’s portfolio rather than buying or selling it immediately (i.e., treating it as a holding).

Read More

2025-07-23 11:16