On Oct. 17, streaming video giant Netflix (NFLX -0.29%) reported financial results for its fiscal third quarter (ended Sept. 30) of 2024. The very next day, on Oct. 18, the stock hit an all-time high above $750 per share and recently topped $765. Shares have been on a stunning run ever since dipping below $200 in 2022.
Netflix stock was in free-fall mode in 2022 after reporting its first drop in revenue in its 20 years as a public company. But since it reported that revenue dip, growth has reaccelerated. In Q3, its revenue was up 15% year over year -- nearly twice its growth rate in the same quarter of 2023.
One impressive component of Netflix's growth has been its growth in paid subscriptions. In the first and second quarters of 2022, the company had net losses in its subscriber count. But more than 60 million net subscribers have joined the platform in the two years since it hit bottom. It now has close to 283 million worldwide.
Netflix did a couple of things to stimulate subscriber growth. First, it stopped allowing its subscribers to share passwords with non-subscribers. Second, it launched a lower-priced subscription tier supported by advertising.
The dual approach to growing its subscriber base appears to have worked for Netflix. Those who were freely using someone else's password likely paid to keep streaming their favorite content. And the lower-priced ad tier was likely enticing for those who found the service too expensive.
What's great for Netflix's shareholders is that a double-digit growth rate is set to continue. Management believes it can grow revenue by 15% year over year in the upcoming fourth quarter. In its fiscal 2025, it thinks it can grow between 11% and 13%.
These are strong numbers for a company as big and mature as Netflix, and it's no wonder that the stock is hitting all-time highs as a result.
So is Netflix stock still a buy today?
Netflix's revenue growth is impressive. But as an investor, I'm far more impressed with what it's done with its bottom line. When its growth flatlined in 2022, its operating margin started dropping, and this had many investors worried. After all, producing quality content costs money, and even from a free cash flow perspective, the company was barely breaking even.
Netflix's transformation with its operating margin and free cash flow has been remarkable. Its Q3 operating margin of 30% was spectacular, and up dramatically from 22% in the prior-year period. Moreover, free cash flow on a per-share basis has skyrocketed to an all-time high.
NFLX Free Cash Flow Per Share data by YCharts.
A few years back, I didn't personally believe Netflix was capable of such a decisive and dramatic turnaround in profitability. I sure was wrong, and it caused me to miss the incredible gains with the stock.
Assuming Netflix continues to flex these profitability muscles, it could make for a compelling long-term investment. Its price-to-sales (P/S) valuation is getting pricier at almost 9. But the company might actually have the growth to back it up.
As mentioned, Netflix expects 11% to 13% growth in 2025, which is on top of this year's 15% growth. But management dropped a valuable nugget in its letter to shareholders that bodes extremely well for shareholders beyond next year.
As of this writing, roughly half of Netflix's new subscribers are signing up for the cheaper advertising tier. But according to management, advertising isn't what's expected to drive revenue growth in 2025. To the contrary, the company believes that it's still in the early stages of increasing its monetization with advertising.
In other words, Netflix is expecting hot growth this year and next. But after 2025, growth can be sustained as its advertising platform -- not even two years old yet -- starts to gain enough scale to command higher and higher monetization rates.
Netflix stock may be at an all-time high right now, and its valuation might have ticked higher. But the company's profitability is undeniably impressive, and advertising can lift the entire business even more in coming years as management improves its technology.
For this reason, Netflix stock may indeed still be a buy today.
