Should you invest in Netflix?

Shares in Netflix have soared to an all-time high after the company unveiled strong fourth-quarter results on 21 January. The share price opened almost 15% higher today (22 January), just shy of $1,000.

Investors have been buoyed by a sharp increase in the number of subscribers in the final quarter of the year, as well as an increase in subscription fees in several regions including the US and Canada. The company also upgraded its forward-looking guidance for 2025.

With an unmatched library of content, it is easy to see why subscribers and investors have been getting excited. Several hit titles are set to return in 2025, including Squid Game, Stranger Things and Formula 1: Drive to Survive.

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Netflix has also been expanding its offering to include new areas like live sport. The Jake Paul-Mike Tyson boxing match which aired in November became the most-streamed sporting event ever, peaking at 65 million concurrent streams.

Despite this, Netflix shares are currently trading at around 40 times their earnings, suggesting they could be overvalued at their current price.

Furthermore, Morningstar analysts have warned that there could be limited opportunities to grow the audience further in the company’s two main regions.

“We still think penetration opportunities in the US and Canada, and Europe, the Middle East, and Africa – the two highest-priced regions – are modest,” writes Matthew Dolgin, senior equity analyst at Morningstar.

With this in mind, Dolgin says that price increases and advertising revenues should be the bigger determinants of growth going forward.

The company is still making progress with the latter, but co-chief executive Gregory Peters described 2025 as the year Netflix would “transition from crawl to walk” in terms of ad revenues.

Netflix does not currently publish its ad revenue figures but claims to have doubled these in 2024, with an ambition to do the same again in 2025.

What did Netflix’s latest results reveal?

Quarterly revenues narrowly beat forecasts, coming in at $10.2 billion. Analysts’ estimates and the company’s own forecasts had pointed to $10.1 billion. This amounted to year-on-year growth of 16%.

The streaming platform also blew subscription estimates out of the water, with 19 million new subscribers over the quarter. The BBC reports that 9.6 million had been expected. Netflix’s subscriber base is now 16% larger than a year ago.

Many analysts had expected the rate of subscriber growth to slow as the boost from the company’s password-sharing crackdown in 2023 receded into the distance, however there was little evidence of this in the most recent quarter.

Can Netflix continue to soar?

Netflix has upgraded its revenue forecast for 2025 by $500 million, despite headwinds from a strengthening US dollar. This is equivalent to an increase of just over 1%.

Its updated guidance reflects “improved business fundamentals” and the “expected carryover benefit” of its strong fourth-quarter results, the company said.

As of 21 January, the entertainment giant has also adjusted prices across most of its plans in North America – its largest region based on revenues – as well as a couple of other locations.

Rising prices can be a bad thing in some cases but, so far, investors don’t seem worried that this will deter subscribers.

“A monthly subscription to Netflix is still an affordable treat and no more than a round of coffees for a group of four or a few beers after work,” says Dan Coatsworth, investment analyst at AJ Bell.

With a range of packages available in most regions, customers can also pay less for their subscription if they are willing to watch advertisements. Ad packages accounted for 55% of sign-ups in the most recent quarter, Netflix revealed.

The streaming giant plans to improve its offering for advertisers this year so that it can grow its ad revenue further. Dolgin says this isn’t a meaningful source of revenue for the company at present, and that growing it will be instrumental in determining Netflix’s performance going forward.

“Given the growing share of ad-supported plans in the total member base and their far lower subscription prices, we think generating meaningful advertising revenue is imperative to keep sales growth up and average revenue per member growing,” he says.

Morningstar has upgraded its fair value estimate for the company from $550 to $700, but this is still significantly below the current share price ($998 at market open on 22 January).