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Why the Netflix Stock (NFLX) Rally Isn't Done Yet
Netflix (NFLX) has soared almost 80% over the past year, recently topping $1,200 per share, prompting concerns that the stock may be overextended. Critics point to its sharp rally, driven by strong subscriber growth and bold strategic pivots, as a sign of potential overvaluation.
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But this momentum may be more than just a temporary surge. With growing strength in AI, live content, and multiple revenue streams, Netflix appears well-positioned for sustained growth. While a near-term pullback is possible given its valuation, a drop below $1,000 is unlikely. I'm strongly bullish on the cord-cutting stock that consistently disproves the naysayers.
AI-Powered Recommendations: Keeping You Hooked Longer
One of Netflix's most significant successes lately is the progress made in AI-powered recommendations. You're firing up Netflix and are likely to land on a show that feels like it was made for you, a great stride given that this was one aspect the company was struggling with in the past. That's the magic of Netflix's AI-driven recommendation engine, which drove 80% of content consumption last year, with subscribers averaging two hours of watch time daily.
AI refines these Netflix algorithms, analyzing viewing patterns to serve up hits like Squid Game Season 2, which smashed records with 68 million views in its first week. This is great for customer satisfaction and should translate to higher retention. This is evident in churn rates holding steady despite price hikes. By personalizing content at scale, Netflix ensures subscribers stay, while, along with new cohorts coming in by the quarter, its membership and ad revenues both increase.
AI Empowerment Begins to Deliver
AI is also playing a key role in driving investor enthusiasm for Netflix, as it's already transforming how content is developed and produced. From analyzing scripts for audience appeal to optimizing shooting schedules and streamlining post-production, AI allows Netflix to cut costs without compromising quality. A recent example is Carry-On, the holiday thriller that garnered 42 million views in its first week—AI helped refine its pacing to maximize viewer engagement.
At the MoffettNathanson Media Conference, Netflix management emphasized how these efficiencies enable the company to deliver a wide-ranging content slate—from Guillermo del Toro's Frankenstein to Happy Gilmore 2 —without inflating budgets.
As Netflix plans to invest $18 billion in content in 2025, its ability to stretch production dollars through AI gives it a competitive edge. While other streamers continue to grapple with platform scalability, Netflix's proven ability to deliver high-quality originals efficiently reinforces its position as a leader in the space.
AI-Driven Ads Haul in Big Bucks
Then you have Netflix's ad-supported tier, launched in 2022, which has been a runaway success, reaching 94 million monthly active users by early 2025, up from 40 million the year prior. AI is the secret sauce here, crafting ads that feel less like interruptions and more like part of the experience. You're pausing Stranger Things and seeing an advertisement for a retro diner that matches the show's vibe. AI's targeting makes that happen.
We could also see Netflix rolling out AI-generated ads by next year, hyper-targeting viewers with cinematic precision. Management projects this tier could double ad revenue this year. With 45% of new sign-ups in ad-tier markets opting for this plan, Netflix is tapping a goldmine that rivals can't match. The risk here is overloading viewers with ads, which could spark backlash. However, I trust management's execution skills in this regard.
Stretched Valuation Justified by Stability
Despite the excitement around Netflix's AI-driven efficiencies, the stock now trades at over 47x this year's consensus EPS estimate—an elevated valuation, even for a category leader with double-digit growth. Bears argue that a correction is overdue, and there's merit to that view. I agree that Netflix could experience a healthy pullback. However, investors waiting for a significant drop—particularly below $1,000 per share—may be waiting in vain.
With consistent top-line growth and AI poised to drive long-term margin expansion, Netflix is well-positioned to sustain 20%+ annual EPS growth for the foreseeable future. Coupled with its consumer-staple-like attributes—namely, highly predictable cash flows—the company is likely to continue commanding a premium valuation. For long-term investors, Netflix remains a high-quality name that the market will be willing to pay up for.
Is NFLX Stock Expected to Rise?
Wall Street remains highly bullish on Netflix, with a Strong Buy consensus based on 29 Buy and nine Hold ratings over the past three months, and notably, no Sell ratings. However, the average 12-month price target of $1,239.76 suggests a modest 2.2% upside from current levels.
In my view, this reflects a continued underappreciation of Netflix's earnings growth potential, particularly as AI-driven efficiencies and strong content performance support long-term margin expansion.
Netflix's Hopes Aren't Fading Anytime Soon
Netflix's impressive share price rally reflects growing investor confidence in its ability to harness AI to boost revenue and reduce costs. From AI-enhanced user engagement and efficient content production to the rapid growth of its ad-supported tier, Netflix is increasingly viewed as the undisputed leader in the streaming space, with the potential for even greater dominance ahead.
While the stock's valuation is undeniably elevated, the company's strong earnings trajectory suggests that a significant pullback is unlikely in the near term.
