The world is Netflix‘s (NFLX -0.14%) oyster. That is what it has felt like over the past few years as the company has sucked all the oxygen out of the video streaming market.
Its global presence and huge catalog of content give it a competitive advantage over streaming rivals, which is why viewers flock to the service. Revenue continues to march higher, while profits are soaring.
Management does not think the growth party is over just yet. According to reporting from The Wall Street Journal, Netflix is aiming to reach a market cap of $1 trillion by 2030, which would be around double its current level at $500 billion. Here’s the math behind the analysis and whether the company can hit these targets by the end of the decade.
Global expansion and pricing power
Video streaming processed through the cloud has turned the media sector into a truly worldwide game. Netflix has taken advantage of this global pie, investing to produce video specifically in markets such as Europe, Latin America, South Korea, and India.
This global expansion is why it eclipsed 300 million total subscribers at the end of 2024, making it the largest pure-play premium video streamer in the world. With a global population of 8 billion and rising use of the internet every year, there is plenty of room to expand its total subscribers in the years to come.
Another factor for Netflix’s success is pricing power. In the U.S., its premium subscription tier has gone from $11.99 a month in 2013 to $24.99 currently. This more than doubling in monthly subscription fees has helped revenue grow by close to 600% in the last 10 years.
More importantly, it has helped the company gain some operating leverage over its cost base, with operating income inflecting higher to $11.3 billion in the last few years. Free cash flow is now positive at $7.5 billion over the last 12 months, giving the company the flexibility to keep pushing for more growth globally.
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Sports and advertisements
By 2030, Netflix wants its advertising tier to generate around $9 billion in global ad sales, up from an estimated $2 billion currently. This advertising tier was launched in 2023 and is a huge driver of new sign-ups for Netflix.
As it rolls out globally, it will hopefully see even more customers sign up. Advertising has historically been a huge revenue driver for the media industry that Netflix decided to lay off of for a long while. Now, it is turning on this new revenue stream and hopes to see huge growth in the years to come.
An easy way to connect with advertisers is by adding sports content. Sports leagues are one of the biggest draws for large advertisers because they bring in millions of live viewers for games, something that is not happening with traditional TV shows or movies anymore.
Netflix is starting to invest in sports such as licensing World Wrestling Entertainment, which has weekly live events. Investors should track Netflix’s investments into sports streaming rights in the years to come. They may have a large impact on the advertising revenue for the business.
NFLX Operating Margin (TTM) data by YCharts; TTM = trailing 12 months.
The math to a $1 trillion market cap
According to the reporting, Netflix aims to double its revenue to $80 billion in 2030 and triple its operating income to around $30 billion. Advertising revenue of $9 billion will be a large part of that equation.
How will the company do it? It hopes to grow its total subscribers to 410 million compared to 300 million at the end of 2024. However, that would only lead to about 30% growth in revenue assuming no changes to subscription pricing.
What this means is that Netflix will need to continue increasing the price of its subscription service while simultaneously growing advertising sales if it hopes to double revenue in the next five years. This is a tall task, but one it is poised to achieve.
Operating income tripling to $30 billion feels doable as well. Expanding operating margins is not something a company can do indefinitely, but Netflix has consistently pushed up its operating margin in the last 10 years, hitting 28% in the last 12 months. I think the company can keep expanding its profit margins as it scales up to greater heights in the years to come.
That $30 billion in operating income likely equates to $25 billion in net income when factoring in corporate tax rates. Should Netflix be valued at a trillion-dollar market cap if it generates $25 billion in net income? Maybe. That is a price-to-earnings ratio (P/E) of 40, which is well above the average for stocks, even durable growers like Netflix.
It is possible, but not a guarantee, that the market cap will double to $1 trillion in the next five years. We have no idea what the stock’s future P/E will be.
It still remains a good hold for investors who have bought the stock in the past. However, I don’t think Netflix is a strong buy today.