Netflix shares hit record high as investors embrace profit push

Chicago – Netflix shares hit their first record in nearly three years as investors continue gravitating towards the streaming-video company while its strategy to improve profitability plays out.

The shares rose 1.5 per cent on Aug 20, taking out a high that had stood since November 2021, the peak of its Covid-19-era success. In a sign of its growing advertising might, the company earlier that day disclosed a more than 150 per cent increase in upfront ad sales commitments compared with 2023.

“Investors are really embracing Netflix’s strategy,” said Mr Daniel Morgan, senior portfolio manager at Synovus Trust.

“The Netflix story used to be that it was spending a ton on content, have negative free cash flow and that it would issue debt. It isn’t doing that any more, and that’s made a huge difference. It is really ahead of the pack here and being rewarded for that consistency.”

The record represents a remarkable turnaround for the stock, which at one point lost more than 75 per cent of its value from its 2021 peak.

The stock has quadrupled since, as Netflix cracked down on users sharing accounts and introduced a subscriber tier supported by advertising – steps it had long resisted but which have proved successful in easing investor concerns about growth and cash flow.

Beyond the financial improvements, the company delivered a number of major hits last quarter, including a new season of Bridgerton, the surprise hit Baby Reindeer and the French movie Under Paris. It has also taken steps into sports and live events, and in the second quarter, Netflix extended its lead over rivals, adding 8.05 million customers.

Shares climbed for a sixth straight session and have risen more than 40 per cent in 2024. That puts Netflix well ahead of Walt Disney Co, which is slightly negative in 2024, and significantly beyond both Warner Bros Discovery and Paramount Global, both of which are down more than 25 per cent.

The rally in Netflix has brought its 14-day relative strength index to 72.5, putting it in overbought territory. But improvements in profitability have diminished concerns about the company’s multiple. Netflix trades at 32 times estimated earnings, less than half its 10-year average of 72. The Nasdaq 100 Index has a multiple of 26.

The multiple “certainly isn’t off the charts, and it has even been coming down because of how much it is improving its profitability”, Mr Morgan said.

“That’s another reason to feel comfortable and why analysts and investors have really accepted the change in strategy.” BLOOMBERG