The Netflix share price has surged 50% this year, more than twice as much as the S&P 500. Anyone who invested in the summer of 2022 has seen its value quadruple.
This marks a strong recovery after post-pandemic streaming fatigue and concerns about Netflix's crackdown on password sharing this year, which created uncertainty on Wall Street, and raised questions about whether password-sharers would create accounts or leave the platform.
30m new subscribers per year
However, this password strategy has proven successful. Since mid-2022, Netflix's global user base has grown by over 50m, reaching more than 280m. Netflix’s cheaper, ad-supported subscriptions, introduced nearly two years ago, have grown by 35%. Netflix typically adds 30m new subscribers annually, showing its current measures are working. However, disappointing results — particularly in subscriber growth or ad revenue — could put the platform under pressure, as the streaming market appears to be nearing saturation again.
Netflix stock is not cheap
Netflix is currently trading at 33 times its projected profit for the next 12 months, compared to the S&P 500’s average price-earnings ratio of just over 21. This leaves little scope for an increase in valuation if Netflix's growth slows in the coming year, as the “low-hanging fruit” has already been dealt with. Even if the company meets its sales targets, Netflix’s high valuation prices in strong subscriber growth, and any disappointments may lead to quick profit-taking in the stock.
A healthy correction?
However, a drop from current highs around $480 could be a welcome cooling-off for investors, giving them a chance to reassess based on updated figures. The alternative is another record run towards $1,000, at which point investors should critically evaluate the stock's valuation.
