One of the biggest secular tailwinds in recent years is the advent of artificial intelligence (AI). The latest advancements in AI went viral early last year, and the list of companies in the $1 trillion club is littered with businesses on the leading edge of this next-generation technology.
For example, Apple products — including Siri and Maps — have always embraced AI, while Microsoft, Alphabet, Amazon, and Meta Platforms have developed seemingly impenetrable moats by integrating AI deeply into their respective business operations. Nvidia and Taiwan Semiconductor Manufacturing have developed the chips that make AI possible.
Netflix (NASDAQ: NFLX) is one of the pioneers of AI, using cutting-edge algorithms to inform its streaming recommendations and production choices, yet the company has fallen out of favor with some who are busy chasing the latest shiny new thing. Investors might be surprised to learn that Netflix just delivered another quarter of double-digit growth. With a market cap of just $324 billion, it might seem premature to suggest Netflix is bucking to join its peers in the trillion-dollar club, yet the stock has gained more than 100% over the past year and 1,380% over the past decade, and the evidence suggests its ascent will continue.
Bullish results
Netflix just reported its third-quarter results and sailed past expectations on every important metric. Revenue of $9.83 billion climbed 15% year over year, generating robust profit growth as earnings per share (EPS) of $5.40 soared 45%. Revenue was fueled by strong paid subscriber growth that jumped by more than 5 million, an increase of 14%. The bottom line was driven higher by an expanding operating margin that increased by an incredible 720 basis points to 29.6%.
For context, analysts’ consensus estimates were calling for revenue of $9.77 billion and EPS of $5.12, accompanied by subscriber additions of 4.5 million, so Netflix beat across the board.
Perhaps more importantly, management expects its growth streak to continue. Netflix is guiding for fourth-quarter revenue of $10.1 billion, up nearly 15%, while EPS of $4.23 would more than double.
Incremental levers for growth
On the conference call to discuss the results, Netflix laid out plans to continue its impressive growth, highlighting three particularly significant opportunities.
Netflix has been dabbling in video games for some time now, but the company is beginning to see greater interest from its audience for the games based on the company’s growing library of intellectual property. Management is particularly excited about the title based on Squid Game, the company’s most-watched series.
Management is also leaning into its recent successes with live events. Netflix is live-streaming a boxing match between Mike Tyson and Jake Paul on Nov. 15. The company also has exclusive rights to two NFL games on Christmas Day: The Super Bowl LVII-winning Kansas City Chiefs vs. the Pittsburgh Steelers, and the Baltimore Ravens vs. the Houston Texans. Finally, Netflix is the new home of WWE Raw, the highly rated wrestling entertainment show, with weekly episodes beginning in January 2025.
However, the company’s biggest opportunity is its growing digital advertising business. Netflix noted during the call that its audience and ad inventory are currently growing faster than the company’s ability to capitalize on that growth. Members signing up for the lowest-priced ad tier increased 35% quarter over quarter and accounted for 50% of new members in the countries where Netflix shows advertising.
The company has a couple of important initiatives that are designed to accelerate its ads business. First, Netflix is launching its first-party ad server, beginning in Canada this quarter, then in the rest of its advertising markets in 2025. The company is also leaning into its partnership with The Trade Desk to expand its advertising reach. Netflix noted that ad-tier members are similar to other subscribers in terms of hours watched and preferred titles, which shows viewing patterns are consistent. Management expects ad revenue to double (off a small base) in 2025.
Each of these initiatives represents an incremental growth driver, which helps illustrate how Netflix plans to continue its robust growth.
The path to $1 trillion
Netflix currently has a market cap of $323 billion, which means it will take stock price gains of roughly 207% to drive its value to $1 trillion, but there’s a clear path for growth over the coming decade. According to Wall Street, Netflix is expected to generate revenue of $38.74 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 8. Assuming its P/S remains constant, Netflix would have to grow its revenue to roughly $357 billion annually to support a $1 trillion market cap.
Wall Street is currently forecasting revenue growth for Netflix of about 26% annually over the next five years. If the company achieves that benchmark, it could achieve a $1 trillion market cap as soon as 2035. It’s worth noting that Netflix has grown its annual revenue by 562% over the past decade, and its net income has soared 1,450%, so Wall Street’s outlook could well be conservative. Furthermore, as this quarter illustrates, Netflix has a habit of outpacing Wall Street’s expectations, which could also shave years off this timeline.
Finally, Netflix is currently selling for roughly 39 times earnings, which might seem expensive at first glance, but consider this: Wall Street expects Netflix to generate EPS of $23.11 in 2025, which would represent a multiple of 30 — the same as the S&P 500. Considering Netflix’s strong track record of growth and its significant opportunity, I’d say that’s a fair price to pay for a company expected to generate consistent double-digit growth over the next five years.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Taiwan Semiconductor Manufacturing, and The Trade Desk. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Meet the Unstoppable Stock That Could Join Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta, and Taiwan Semiconductor Manufacturing in the $1 Trillion Club by 2035 was originally published by The Motley Fool
