Netflix's strategic ability to leverage its content spending is nothing short of impressive and is poised to give the streaming giant a further competitive edge in the evolving media landscape, according to Wedbush Securities. The company recently reported higher-than-expected third-quarter results, with new subscriber numbers surpassing Wall Street's forecasts.
Notably, Netflix anticipates that its fourth-quarter revenue will grow by 15% year over year. This optimistic outlook is bolstered by expectations of higher net subscriber additions driven by seasonality and a robust content lineup. The company's content slate for 2025 includes highly anticipated new seasons of fan-favorite shows such as "Wednesday," "Squid Game," and "Stranger Things," along with new projects from industry heavyweights like Shonda Rhimes and Ryan Murphy.
Ted Sarandos, Netflix's co-Chief Executive, expressed his enthusiasm during an earnings conference call, stating, "We could not be more excited about where we sit right now and where we're heading." Wedbush analysts, including Alicia Reese, highlighted Netflix's impressive ability to manage and leverage its content spending effectively.
They noted that growth in 2025 is expected to be driven by a more robust slate of content compared to the previous year, which was partially affected by the Screen Actors Guild - American Federation of Television and Radio Artists strikes that took place late last year. Analysts maintain that Netflix is in a strong position to sustain high-quality production thanks to its healthy cash flow.
While competitors may need to tread carefully to achieve or maintain profitability, Netflix can afford to spend significantly more on content — potentially increasing its content investment beyond the anticipated $17 billion allocation for 2024. The company faces a backdrop of reduced competition compared to what it experienced before the strikes. In light of these insights, Wedbush raised its price target for Netflix stock from $775 to $800, while reaffirming its outperform rating.
Following the report, Netflix shares rose by 10% during Friday's trading and have experienced an impressive 55% increase in value year-to-date in 2024. A key advantage for Netflix is its large subscriber base, which allows the company to justify substantial investments in content that resonates with approximately 10% of its audience, translating into around 300 million households. The analysts suggest that as Netflix begins to slow its rate of content spending growth to levels significantly below its revenue growth, the influx of new revenues will likely contribute to operating margins of 50% or more.
This, in turn, is expected to elevate overall operating margins beyond 30% and catalyze a dramatic increase in free cash flow. Co-CEO Greg Peters shared insights on the company's anticipated advertisement revenue growth, projecting it could nearly double year-over-year, albeit starting from a modest base.
He further emphasized confidence in this prediction by stating, "In this year's U.S. upfront, we're seeing... over a 150% increase in our ad sales commitments." In consideration of improvements to its advertising offerings and targeting, alongside new partnerships and the introduction of more live events, Netflix is set to bolster its ad-tier revenue contribution over the next few years, with Wedbush projecting that this tier will emerge as the primary growth driver by 2026..