Netflix rides on higher subscriptions and pricing

Published: 2025-06-25 02:06:29 ET NFLX

Published on 06/25/2025 at 02:06, updated on 06/25/2025 at 07:54

By Rachel Harp

Netflix, Inc. has started 2025 on a strong note, with Q1 performance exceeding guidance, fuelled by higher subscription, pricing and ad revenue. The company continues to focus on creating and producing rich entertainment content across geographies and delving into newer initiatives to sustain its revenue and operating performance. However, stiff competition in the entertainment video services space from other global and regional players might contribute to a rising content war in the industry.

Netflix Inc., founded in 1997 in California, US, is one of the world’s leading entertainment services, with over 300m paid memberships in over 190 countries. Members can enjoy TV series, films, and games across a wide variety of genres and languages. The company strives to provide its members with compelling content that enhances the viewing experience. The group offers attractive pricing plans, including its ad-supported subscription plan, to meet a variety of consumer needs.

Region wise, Netflix generated about 44% of its revenue in the US and Canada (UCAN) in Q1 25; with Europe, Middle East, and Africa (EMEA) representing 32% There were 12% contributions each from the Latin America (LATAM) and Asia-Pacific (APAC) regions.

The company reported a strong start to 2025, with revenue and operating income increasing 13% and 27% y/y, respectively in Q1 25, surpassing guidance levels, driven by slightly higher subscription, pricing and ad revenue. As a result, revenue reached $10,543m in the quarter, while operating income was  $3,347m, with margins expanding over 360bp to 31.7%. Net income rose 24% to $2,890m.

Netflix is focused on executing its 2025 priorities, including improving its series and film offering and growing the ads business. In addition, the company plans to develop newer initiatives like live programming and games, which would help to sustain its future revenue and earnings growth. In this respect, Netflix has released one series in Q1 – Adolescence, and three films - Back in Action, Ad Vitam and Counterattack, with all breaking into its all-time most popular lists. Some other recent company developments include launching of ad tech platform in the US, and Q1 launch of WWE RAW.

Netflix plans to continue enhancing its performance, supported by full quarter benefits from recent price changes and continued growth in membership and advertising revenue. As a result, the company expects to post revenues of $11,035m in Q2 25, up 15.4%. Operating income is expected at $3,675m, with its margins expanding to 33.3%.

The group expects 2025 revenue of between $43.5bn and $44.5bn, considering healthy rise in subscriptions, higher pricing and approximate doubling of its ad revenue.

To cater to different tastes and preferences and provide content across a variety of genres, in Q1 the company has released action flick, The Night Agent S2 with 50m views; comedy (Running Point, 36m views); and true crime (American Murder: Gabby Petito, 52m views). Netflix continues to test into new formats and has licensed four episodes of the toddler learning series Ms. Rachel. Investments continue to flow in big special events like WWE and the much anticipated Taylor vs. Serrano boxing rematch on July 11, 2025.

Further to meet the entertainment needs of its 700m audience, with over two-thirds of them living outside the US, Netflix has teams on the ground that understand local tastes and cultures. The company has invested in production infrastructure across the globe to create quality series and films and are now producing in over 50 countries.

Netflix posted a decent revenue CAGR of 14.1% over FY 19-24, reaching $39bn. Operating income outpaced revenue growth, reflecting a CAGR of 32% over the same period, reaching $10.4bn in FY 24, with margins expanding by 13.8% to 26.7%. As a result, net income surged at a CAGR of 36.1% to $8.7bn in FY 24.

The positive earnings trajectory has helped to solidify the group's cash and short-term investments, rising from $5bn at end-FY 19 to $9.6bn at end-FY 24. The cash profile has also been bolstered by a steady increase in cash generation from operations. The company also reported an improvement in leverage with debt to equity declining to 72% from 216% over the same period.

In comparison, Spotify, a global peer, posted a revenue CAGR of 18.3% over the past five years, reaching €15.7bn in FY 24. However, operating income performance outperformed with a CAGR of 88.6%, reaching €1.4bn in FY 24.

Over the past 12 months, the company's stock has delivered solid returns of approximately 91%, reflecting a positive fundamental trajectory. In comparison, Spotify’s stock outperformed with staggering returns of 138%.

Despite the sharp rise in the share prices, the company is trading at a discount to Spotify. Netflix is currently trading at a P/E of 50.1x, based on the FY 25 estimated EPS of $25.6, which is lower than Spotify’s valuation of 74.5x. However, it is trading higher than its 3-year historical average of 38.3x.

Likewise, the company is currently trading at an EV/EBITDA multiple of 39.9x, based on the FY 25 estimated EBITDA of $13.8bn, which is lower than that of Spotify (51.4x). However, it is trading higher than its 3-year historical average of 28.4x.

Netflix is monitored by 48 analysts, 31 of whom have ‘Buy’ ratings and 16 have ‘Hold’ ratings for an average target price of $1,175. However, the recent run-up in share prices means the target price has already been achieved, implying limited upside potential. However, any correction in prices in near term could provide a decent opportunity for investors to evaluate the company.

The analysts’ views are further supported by an anticipated EBITDA CAGR of 20.3% over FY 24-27, reaching $19.2bn, with margins of 34.8% in FY 27. In addition, analysts estimate a net profit CAGR of 21.4%, reaching $15.6bn with margins of 28.2% in FY 27, with EPS expected to increase to $37.3 in FY 27 from $19.8 in FY 24. Likewise, analysts estimate EBITDA CAGR of 41.8% and net profit CAGR of 43.9% for Spotify.

Overall, Netflix appears poised to enhance and lead the prospects of entertainment viewing industry, supported by rich content creation, impressive fundamentals and wide strategic presence. However, some risks, including stiff competition, prudent regulations and FX volatility could impact revenue and margins.

Rachel Harp