Netflix (NASDAQ: NFLX) is the world's largest streaming platform for TV shows and films by number of subscribers and by share of television viewing time. The company just reported its financial results for the second quarter of 2024 (ended June 30), and it extended its lead over its competitors on both fronts.
However, Netflix has still only scratched the surface of its addressable market, which means its stock could represent a significant long-term opportunity for investors. Here's why investors with $650 in idle cash (money they don't need for immediate expenses) might want to allocate it to one share of Netflix.
Netflix added far more subscribers than expected in Q2
Wall Street analysts went into Netflix's second-quarter report expecting to see 4.7 million new subscribers. The company blew that out of the water by adding more than 8 million, taking its total to 277.6 million. On a year-over-year basis, that total represented 16.5% growth, which was the fastest pace in three and a half years, and it marked the sixth consecutive quarter of acceleration.
Netflix also extended its advantage over Walt Disney 's Disney+, which is widely considered to be the second-largest direct streaming service with 153.6 million subscribers.
Netflix said its new advertising tier represented 45% of new sign-ups during Q2 (in markets where it's available), so it's a key source of growth. It allows subscribers to get the full Netflix experience for just $6.99 per month, but they will have to watch ads during programming. The company says the ad tier is monetizing at a lower rate than the $15.49-per-month standard tier, mainly because it has grown so quickly that not all of its outstanding ad inventory has been filled yet.
With that said, some of the world's largest companies are lining up to reach potential customers on the platform, including Coca-Cola and McDonald's . So, the ad tier is driving subscriber growth and it could also become a key driver of revenue growth as it achieves scale.
Subscriber numbers continue to benefit from Netflix's crackdown on password sharing, too. Last year, the company estimated 100 million global households were borrowing the streaming service for free from a family member or friend. Netflix started restricting usage while simultaneously offering a $7.99-per-month paid sharing add-on to convert those free users into subscribers.
The strong overall subscriber result led to a record $9.5 billion in revenue during Q2. It was a 16.8% increase from the year-ago period, and it marked the fourth consecutive quarterly growth acceleration. Netflix's guidance for the upcoming third quarter could reverse that trend, with revenue growth expected to come in at 13.9%. However, management said the outlook is mostly attributable to currency headwinds led by the strengthening U.S. dollar.
Image source: Netflix.
Live programming will help Netflix capture more of its $600 billion opportunity
Netflix is trying to expand its dominance even further by moving into live programming. It already has a few successful attempts under its belt including The Roast of Tom Brady , which aired to 2 million live viewers in May, with 22.6 million subscribers having watched it overall. The best is yet to come, because Netflix will exclusively show the upcoming Jake Paul vs. Mike Tyson boxing match in November, followed by both live NFL games on Christmas Day.
Plus, Netflix will become the home of World Wrestling Entertainment (WWE) for 10 years starting in 2025. It will include weekly live programming in addition to regular live special events throughout each year.
Streaming only accounts for 40.3% of total TV time across the U.S. right now, and Netflix represents just 8.4 percentage points of that figure. Live sports like the NFL were once a staple of cable TV providers, so Netflix can use them to grow the overall streaming market and increase its own share versus its competitors at the very same time.
Based on its current revenue, Netflix has only captured around 6% of an estimated $600 billion annual opportunity across streaming, branded advertising, pay TV, and games. Therefore, increased market share could translate to substantial financial growth over the long term.
Netflix stock might be cheap relative to its long-term potential
Netflix generated $16 in earnings per share over the last four quarters, and based on its stock price of $633.34 as of the close on July 19, it trades at a price-to-earnings (P/E) ratio of 39.6. That represents a premium to the 31.9 P/E ratio of the Nasdaq-100 index, so investors could argue Netflix stock is quite expensive right now.
However, the stock looks much cheaper when measured against its potential future earnings. For example, Wall Street estimates Netflix will generate $22.37 in earnings per share during 2025, placing the stock at a forward P/E ratio of 28.3. In other words, the stock will have to climb 12.7% between now and the end of 2025 just to trade in line with the current P/E of the Nasdaq-100.
But Netflix stock could maintain a premium valuation based on its dominance in the streaming industry, which appears likely to expand. That could drive even further upside next year and beyond.
A decade from now, investors who bought the stock today could certainly be sitting pretty.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy .
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