Netflix (NFLX 0.98%) stock outperformed the broader market during the pandemic, and it could be a winner again even if tariffs pressure consumer spending. Year to date, the stock is up 9%, significantly outperforming the major indexes.
It's even outperforming the elite group of growth stocks known as the "Magnificent Seven", which includes Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. All of these tech leaders have fallen by double-digit percentages this year, as Wall Street prices in the prospects for lower spending for their products in a recession.
However, Netflix is seeing strong demand for its service. Netflix shares trade at a premium valuation, but they're supported by strong financials. The company just reported first-quarter earnings were up 25% over the year-ago quarter.
The problem is that Netflix is a large and well-known platform. Investors have to wonder how much growth lies ahead for a service with more than 300 million subscribers. With the stock trading at 45 times earnings, is there enough opportunity in the streaming market for Netflix to deliver more gains for investors?
Netflix's business performance is indicating great momentum to support more highs for the stock. During the Q1 earnings call with analysts, Netflix executives noted they are not seeing any significant changes in member cancellations, engagement, or switching to lower-priced subscription plans. Of course, that could be interpreted that they are seeing a little bit of variability but not anything outside the ordinary.
First-quarter revenue grew 12.5% year over year to reach $10.5 billion. Management is optimistic about its near-term prospects based on the value it offers with its ad-supported plans. Management expects ad revenue to double in 2025, indicating strong demand for these lower-priced subscription tiers. Netflix's opportunity in advertising is large enough that it could support revenue growth even if demand for higher-priced plans weakens due to the economy.
Netflix has some monster releases coming this year to sign up more members. Its upcoming releases include some of its most-watched shows like Stranger Things and Squid Game, along with promising film releases. Company guidance calls for second-quarter revenue to increase by 15% year over year.
Netflix has a large content library to continue to win over members during a rough economic stretch. But the decision to buy the stock now is tricky, because there's already a lot of growth priced in. If Netflix missed revenue or earnings expectations in the near term, the stock would likely fall.
On the other hand, there are reasons to expect the stock to hit new highs. Netflix has a massive budget to invest in new content with $17 billion spent last year. Releasing more content has always been Netflix's strategy to grow memberships, and the company can afford it. It earned an above-average operating margin of 31.7% in the first quarter, and the company is guiding for operating margin to reach 33.3% in Q2.
Margin expansion should keep earnings per share growing at double-digit rates. The long-term opportunity in Netflix's ad business is a major catalyst for margins. Analysts expect the company's earnings to grow at an annualized rate of 24%. Looking ahead to 2027 earnings estimates, the stock is currently trading at 27 times earnings, which starts to look more reasonable.
Moreover, management sees the potential to sign up hundreds of millions of members over the long term, as it still has a relatively small share of TV hours watched. The stock will likely continue to command a high valuation due to its recurring revenue from subscriptions, strong brand, and margin expansion potential.
Netflix appears to have the most resilient business compared to other leading tech companies. While it's always possible the stock could pull back if a bear market rears its ugly head, investors who buy Netflix stock today and hold for the next five years could earn market-beating returns.
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