Why Netflix's (NFLX) 85% Rally Isn't Done Yet

Business Insider

2 hours ago

Over the past year, Netflix (NFLX) shares have appreciated 82%, prompting the question of whether further upside remains. The company's performance has been supported by a robust content pipeline, rapid expansion of its advertising business, and strategic deployment of generative AI capabilities. In addition, Netflix is generating substantial free cash flow, benefiting from economies of scale and the early success of its high-margin advertising tier. Given the stock's current valuation, the key consideration for investors is whether the growth trajectory justifies continued investment.
Elevate Your Investing Strategy:
Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
Momentum That Just Won't Quit
Netflix delivered a strong second quarter, reporting revenue of $11.08 billion, up 16% year-over-year and slightly ahead of Wall Street's $11.07 billion consensus. Growth was driven by continued member acquisition, higher subscription pricing, and rapid expansion of the advertising business. While the company no longer discloses exact subscriber counts, management noted that membership growth accelerated late in the quarter, particularly in international markets, supported by anticipated releases such as the Squid Game and Stranger Things season finales.
The advertising segment remains a key growth driver, with revenue on pace to double in 2025. This momentum is supported by the full deployment of Netflix's proprietary ad tech platform, which streamlines media buying for brands. The introduction of a redesigned user interface—now implemented on 50% of TV devices—has improved content discovery and engagement, increasing both viewing time and advertiser appeal.
Content continues to be a strategic differentiator. Netflix is investing heavily in globally resonant titles, including Alice in Borderland and the upcoming Happy Gilmore 2. Its partnership with France's TF1 is expected to strengthen local content production, particularly in the European market. The company's gaming initiative is also gaining traction, with early success from cult-classic titles such as Grand Theft Auto enhancing platform stickiness. Overall, Netflix continues to demonstrate the ability to drive growth and innovation, even at a more mature stage of its business lifecycle.
Turning into a Cash Flow Powerhouse
Turning to profitability—particularly free cash flow—Netflix generated $2.3 billion in Q2, representing a 91% year-over-year increase. Management also raised its full-year FCF guidance to $8.0–$8.5 billion. This level of cash generation reflects the benefits of significant economies of scale.
With more than 300 million paid memberships globally, the cost to serve each subscriber declines as the base expands, enabling a greater share of revenue to translate into earnings. While content amortization is projected to exceed $16 billion in 2025, robust subscriber growth helps distribute these costs more efficiently.
The advertising segment is further enhancing cash flow, as incremental ad revenue carries minimal associated costs once the global ad tech platform is in place. Each additional advertising dollar contributes disproportionately to profitability. Operational efficiency gains from generative AI—such as accelerating and reducing the cost of visual effects—are also supporting margin expansion. These factors allowed Q2 operating margins to reach 34.1%, an improvement of nearly seven percentage points compared with the prior year, while still enabling sustained investment in premium content.
Is the Price Tag Worth It?
Now, at 45x this year's expected EPS, Netflix's isn't a bargain, as the company is trading at a steep premium compared to the broader market. But then again, Netflix's dominance makes it hard to call it overpriced. Over the years, they've faced heavyweights like Apple (AAPL), Disney (DIS), and Amazon (AMZN), who've dumped billions into streaming to chip away at Netflix's lead.
Yet, Netflix keeps growing like a weed, with revenue up double-digits quarter after quarter and EPS expected to climb at least 20% per year for the foreseeable future. And while Disney and Amazon have gained ground, Netflix's global reach, brand loyalty, and content machine keep it ahead. Their 'local for local' strategy, which revolves around producing hits in markets like Japan, Korea, and now France via TF1, gives them an edge no one can match.
What is the 12-Month Forecast for NFLX stock?
There are 38 analysts offering price targets on NFLX stock via TipRanks, with a fairly bullish consensus. Today, the stock carries a Moderate Buy consensus rating based on 26 Buy, 11 Hold, and one Sell rating over the past three months. NFLX's average stock price target of $1,394.23 suggests ~13% upside over the next twelve months.
NFLX Transitions from Disruptor to Dominant Leader
Netflix has transitioned from industry disruptor to dominant market leader, while continuing to uncover new growth avenues. Its advertising tier is scaling rapidly, globally resonant content is attracting new audiences, and free cash flow is reaching levels previously thought unattainable. While the stock trades at a premium, businesses combining this degree of growth and profitability seldom come at a discount. For investors seeking a company with a proven ability to adapt, innovate, and maintain a competitive edge, Netflix remains a compelling proposition.