Meet the Tech Titan on the Path to the $1 Trillion Club

Consistently strong growth and incremental opportunities could push this tech titan to new heights.

In recent years, one of the most significant driving forces in technology has been the rise of artificial intelligence (AI). This breakthrough technology gained considerable attention last year, and many companies now valued at $1 trillion have embraced AI to enhance their operations.

For instance, Apple has successfully integrated AI into its products, such as Siri and Maps. Similarly, other tech giants like Microsoft, Alphabet, Amazon, and Meta Platforms have built strong competitive advantages by embedding AI into their core business functionalities. Companies like Nvidia and Taiwan Semiconductor Manufacturing are crucial for developing the chips that power AI technologies.

While Netflix has been a front-runner in utilizing AI to refine its streaming recommendations and content creation, it has recently faced critiques from investors chasing the latest trends. Interestingly, Netflix has reported impressive growth once again, showing that it has not lost its momentum. With a market cap of approximately $324 billion, while it may seem early to predict Netflix's entry into the $1 trillion club, the stock has surged by over 100% in the past year and a remarkable 1,380% over the last decade, suggesting its growth trajectory is likely to persist.

Strong Performance

Recently, Netflix announced its third-quarter results, which exceeded analysts' expectations in several key areas. The company generated $9.83 billion in revenue, representing a 15% increase year-on-year. Earnings per share (EPS) also soared to $5.40, reflecting a staggering 45% growth. Subscriber growth, an essential metric for Netflix, jumped by more than 5 million, reaching an impressive 14% increase. This growth was paired with an expanding operating margin of 29.6%, marking a significant rise of 720 basis points.

In comparison to analyst forecasts, which estimated revenue at $9.77 billion and EPS at $5.12, Netflix's actual results demonstrate its robust performance.

Management remains optimistic about future growth, forecasting fourth-quarter revenue of $10.1 billion (up nearly 15%) and an EPS of $4.23, which is set to more than double.

Growth Opportunities

During the conference call discussing the results, Netflix revealed several exciting opportunities for ongoing growth.

The company has taken steps into the world of video games, witnessing increased audience interest in games based on its growing portfolio of intellectual property. Notably, there is anticipation surrounding the game inspired by the hit series Squid Game.

Additionally, Netflix is expanding its efforts in live event streaming. For instance, the company will be live-streaming a boxing match on November 15, featuring Mike Tyson and Jake Paul. Furthermore, Netflix holds exclusive rights to two NFL games on Christmas Day, showcasing notable teams such as the Kansas City Chiefs and the Pittsburgh Steelers, as well as the Baltimore Ravens facing the Houston Texans. Netflix is also set to host weekly episodes of WWE Raw starting January 2025.

However, the most substantial growth opportunity lies in Netflix's expanding digital advertising business. Management highlighted that the demand for its ad inventory is outpacing the company's ability to fully harness this growth. The adoption of the ad-supported tier has surged, with a 35% quarter-over-quarter increase and constituting 50% of new subscribers in regions where ads are shown.

Netflix is committed to enhancing its ad strategy through various initiatives, including the rollout of its first-party ad server starting in Canada this quarter, followed by further implementations in its advertising markets in 2025. Collaborations with The Trade Desk will also help extend its advertising capabilities. Notably, Netflix has discovered that ad-tier members engage with content just as much as traditional subscribers, indicating healthy viewing patterns.

Each of these initiatives is a valuable growth catalyst, demonstrating Netflix's strategic vision for sustained expansion.

The Road to $1 Trillion

With a current market cap around $323 billion, Netflix would need to see stock price increases of approximately 207% to reach a $1 trillion valuation. Nevertheless, a clear growth path exists for this tech giant over the next decade. Projections suggest Netflix could reach around $38.74 billion in revenue in 2024, equating to a forward price-to-sales (P/S) ratio of about 8. Assuming its P/S ratio remains stable, Netflix would need to grow its annual revenue to roughly $357 billion to support a market cap of $1 trillion.

Wall Street anticipates Netflix will experience about 26% annual revenue growth over the next five years, setting the stage for potential entry into the $1 trillion market cap as early as 2035. Given the impressive growth Netflix has achieved—562% in annual revenue over the past decade and a staggering 1,450% increase in net income—these Wall Street estimates may even be conservative. Furthermore, Netflix has a history of outperforming analysts' expectations, which could further shorten this timeline.

Currently, Netflix's stock trades at approximately 39 times earnings. While this may seem high at first glance, analysts project EPS of $23.11 in 2025, translating to a multiple of 30—similar to the broader S&P 500. Considering Netflix's strong growth history and ample opportunities, this valuation may indeed be justified for a company poised to deliver continuous double-digit growth in the coming years.

Netflix, AI, Growth