To The Moon

Netflix's Q3 2024 earnings report showed impressive growth, with a 15% year-over-year increase in revenue to $9.83 billion and a 41% increase in net income to $2.36 billion. The company also added 5.07 million subscribers, bringing the total to 282.7 million. However, there are underlying concerns about the sustainability of this growth.

1. Price Increases on the Horizon: Netflix guided that for 2025 that “We expect revenue growth to be driven by a healthy increase in paid memberships and ARM. “. ARM is the Average Revenue per Membership. Hence, Netflix may need to implement price hikes to sustain its revenue growth.

2. Ad-Supported Tier Growth: The 35% quarter-over-quarter growth in ad-tier memberships is a positive sign, but it may include existing subscribers downgrading to the cheaper option.

3. Focus on Advertising: Netflix is expanding its advertising business, which could become a significant revenue stream. The company is also investing in new initiatives like gaming and live events.

4. Content Investment: Netflix continues to invest heavily in content, with new seasons of popular shows and new projects from renowned creators. This could drive subscriber growth but also increase costs.

Netflix’s Guidance

Netflix's guidance for Q4 2024 and the full year 2025 provides additional context for the company's future outlook:

• Q4 2024 Guidance: Netflix forecasts 15% revenue growth for Q4 2024, with an operating margin expected to be 22%, a 5-point improvement from last year.

• Full-Year 2025 Guidance: The company projects revenue for the full year of 2025 to be between $43 billion and $44 billion, representing an 11%-13% growth compared to its 2024 revenue guidance of $38.9 billion. The company also targets an operating margin of 28% for 2025.

Investment Strategies

Given the mixed outlook, here are some potential investment strategies:

1. Buy Call Options: If you believe Netflix's advertising business and new initiatives will drive future growth, buying call options could be a good strategy. This allows you to benefit from potential upside while limiting your risk to the premium paid for the options.

2. Sell Put Options: If you are more cautious and believe Netflix's growth may slow down, selling put options could be a viable strategy. This generates income through the premiums received, and you only incur a loss if Netflix's stock price falls below the strike price of the put options.

3. Straddle Strategy: If you are uncertain about the direction of Netflix's stock but expect significant price movement, a straddle strategy could be appropriate. This involves buying both call and put options at the same strike price and expiration date, allowing you to profit from large price swings in either direction.

4. Long-Term Hold: For long-term investors, holding Netflix stock could still be attractive given its strong brand and global presence. The company's shift towards advertising and new content initiatives may pay off in the long run.

Conclusion

Netflix’s Q3 2024 results are solid on paper, but the underlying metrics suggest that the company’s growth story is evolving. While the advertising business has potential, the true extent of the 35% growth in ad-tier memberships remains questionable.

For now, Netflix remains a reliable, cash-generating business, but I'll be watching closely to see how well they manage this transition. Given these factors, it's essential to DYODD and consider your risk tolerance and investment goals before utilising any of the above investment strategies.