Netflix (NASDAQ: NFLX) stock soared a further 10% last week after its latest Q3 earnings report released Thursday (17 October) was a blockbuster hit. Thanks to a new advertising tier and a crackdown on password-sharing, the streaming giant’s raked in record profits. The stock now looks set to skyrocket as investors anticipate even more growth in the coming months. 

While advertising revenue’s on the rise, it’s cautious about its impact on overall revenue next year. Nevertheless, the company’s subscriber base continues to expand, reaching a staggering 282.7 million worldwide.

Operating profit margins were 29.6%, beating July expectations of 28.1%, and revenue increased 15% to $9.82bn. Earnings came in at $2.36bn ($5.52 per share), up 41% from $1.68bn in Q3 2023. It now expects revenue in Q4 to reach $10.13bn and earnings per share (EPS) to stabilise at around $4.23.

An impressive turnaround, no doubt. But how did it all come about?

A risky idea that paid off

Netflix introduced advertising on its platform in 2022 after suffering significant losses. By mid-June that year, the share price had collapsed 75% from a high of $690 in late 2021. Subscriber numbers had also fallen for the first time in over a decade.

The price has since recovered all those losses, climbing 335% to a new high of $763 per share.

The new ad-tier offers membership at a discounted rate with 15-30-second adverts before and during playback. Despite some initial pushback, the strategy appears to have paid off. Membership of the new tier increased 35% in the past quarter, catapulting the company back to new highs.

The tier’s currently available in the US, Australia, Brazil, France, Germany, Italy, Japan, and South Korea. There are plans to launch later this year in Canada and in several more locations globally in 2025. One notable downside to the tier is that it blocks shows and films that don’t permit advertising. Currently, there are 155 movies and series blocked on the ad-tier membership service.

Nobody likes stale popcorn

Tech stocks always face the risk of rapidly evolving technology and new players entering the space. History’s full of examples of popular tech rapidly falling out of favour — anyone remember Blackberry? Netflix is no exception.

Digital streaming’s becoming increasingly competitive and rivals such as Disney+, Amazon Prime Video, and HBO Max threaten Netflix’s market share and profitability. Whereas Netflix is solely a video streaming service, most of its rivals are subsidiaries of larger companies.

This could limit Netflix’s ability to compete financially. Regulatory changes, licensing laws and rising production costs also threaten its bottom line. To remain fresh and relevant it can’t become complacent. 

Yet despite all the bumps along the road, Netflix is doing surprisingly well. It added 5.1m subscribers this quarter, far higher than the 4.5m expected by Wall Street. Last year, I almost waved farewell to the company, feeling it was failing to compete in a saturated market.

Now, I’m checking how much capital I have available to buy the shares next month.