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LAUREN ALMEIDA | TEMPUS

Should you buy shares in Netflix?

The stock is trading at a discount compared with its own recent history even after climbing 10 per cent in a few hours this week

Lauren Almeida
The Times

Netflix was the biggest riser in the S&P 500 on Wednesday, after the streaming company reported that it had added a record 19 million new subscribers in the Christmas period. It was enough for investors to send its market value up by $36 billion, or roughly 10 per cent, in the space of just a few hours. But is it still safe to be pouring into one of the most highly valued stocks on the west coast?

There is no denying that it was an impressive set of numbers: the group added 18.9 million subscribers in its holiday quarter, almost double what analysts on Wall Street were expecting and far ahead of the 15.8 million it added in early 2020 during the lockdown-era boom in content streaming. The surge was partly thanks to live sporting events, in particular two live American football games that aired on Christmas Day and a boxing match between Mike Tyson and Jake Paul, as well as the return of its most popular series ever, the South Korean drama Squid Game.

There are, as ever, questions about how Netflix can sustain these levels of growth, especially as the report marked the last time that the company will break out its subscriber additions.

One of Netflix’s two co-chief executives, Greg Peters, said during the earnings call on Tuesday that Squid Game, the NFL games and the boxing match were only responsible for a “small minority” of the members acquired in the quarter. Indeed, management appears confident that it can retain both new and old customers: Netflix is planning to increase the price on most of its subscription plans in the US, Canada, Portugal and Argentina. In its home market the basic tier with adverts will increase by $1 a month to $7.99, a 14 per cent rise, the first increase ever for this plan. Meanwhile, the premium package will rise by 9 per cent to $24.99.

Higher prices and more subscribers are a recipe for success, and Netflix shares prior to the announcement had already enjoyed a strong run, up by roughly 80 per cent over the course of 12 months. At a whopping $423 billion, it is now one of the biggest players in showbiz, with a market value that exceeds Warner Bros Discover, Comcast, Paramount and even the House of Mouse, Walt Disney.

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Advertising and live sports are critical to its next stage of growth. The ad tier has been central to Netflix’s strategy, and live programming will be key in increasing revenues further. The company shows ads during football and wrestling to all of its subscribers, not just those on the cheaper tier. This part of the business is still in the early stages, and Netflix has said that it will not produce material financial benefits here until 2026 — but there is already some progress: the majority of new customers now opt for advertising in the 12 markets where it is available, and Netflix hinted that the ad business will double its revenue this year, though it did not go into specifics.

These are promising signs but getting the right mix of major sporting events will be key. Netflix has already turned away from some live sports because the broadcast rights were deemed too expensive, although it did license the rights to the Fifa Women’s World Cup, and some analysts reckon that it could be a partner for the Ultimate Fighting Championship, an American mixed martial arts league based in Las Vegas. Wrestling looks as if it could be an attractive area — the debut of WWE’s Monday Night Raw attracted five million views in its first week on Netflix, which the company said was about twice the audience that it received on linear TV and its biggest audience in the US in five years. At the very least, it demonstrates Netflix’s strong bargaining power when it comes to licensing rights — it can bring a huge, young and global audience to live sports.

This column last rated Netflix as a hold over concerns about the sustainability of its growth and the company’s plan to phase out the reporting of subscriber numbers. Lower transparency should not be accepted by shareholders, though Netflix says that it measures its performance on revenue and earnings growth as its business is now more complex because of the addition of advertising and account-sharing options.

Netflix shares are, like many of the growth names in the American technology sector, highly prone to volatility in the hours after their earnings reports. Stripping out subscriber numbers from these updates could help to smooth out big rises and falls. But investors should still regard this with a healthy dose of scepticism — tech companies have form for reducing the detail in their report when those metrics no longer support their big growth valuations. When Twitter, now known as X, was listed on the stock market, it stopped reporting its monthly active users when the number was going in the wrong direction. Apple stopped disclosing device unit sales in 2018 when its iPhone segment began to slow. From Netflix’s perspective, with a global subscriber base of more than 300 million and well ahead of any other competitor, it is not difficult to see why it wants to avoid disappointment in this area.

All this is not to mention the intense competition that Netflix faces from deep-pocketed rivals such as Amazon Prime, Apple+ and Disney+. But the company is still confident about its performance this year — it has increased its revenue forecast for its 2025 financial year to a range of $43.5 billion to $44.5 billion, an increase of $500 million compared with its previous forecast. That is despite the fact that it also faces a stronger US dollar. It has also projected its highest operating margin yet of 29 per cent, compared with 18 per cent back in 2020.

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There are big growth expectations attached to the stock, at a forward price to earnings multiple of 38.9. That is by no means cheap, but it is at a discount to its own recent history, at a five-year average of 44.7. Netflix still offers investors very strong quality and decent opportunities in advertising and sports, but at this price tag combined with less detail for investors to monitor its growth, buying at this point could be risky.

Advice Hold

Why Growth opportunity in ads and live sport reflected in valuation

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