The list of businesses that have done better for their shareholders in the past 20 years than Netflix (NFLX 0.79%) is undoubtedly a very short one. This booming streaming stock has skyrocketed 13,500% during that time, certainly making millionaires along the way. In fact, a $7,500 initial investment back then would be worth more than $1 million today.
With a current market cap of $272 billion as Netflix shares approach record territory, is it too late to buy this stock?
Dominating the streaming industry
A discussion about Netflix can't ignore how wonderful of a business it is. The key ingredient for the company's success is its first-mover advantage in the industry. Executives were convinced that the internet would radically shift how consumers viewed video content. And boy, were they right.
Netflix first launched its streaming service in the U.S. in 2007. Today, it has 270 million subscribers scattered in 190 countries across the globe. For most of the last 17 years, the business had minimal direct competition, helping it rapidly attract customers who were simply drawn to the superior user experience.
This has now become a media powerhouse with unrivaled scale. In 2023, Netflix raked in $33.7 billion in revenue, which allows it to spend about $17 billion annually to produce and acquire fresh content. That content budget keeps existing members satisfied, while helping bring in new ones.
Financial prowess
Netflix's scale has resulted in outsized financial success. This is something the company's critics didn't think would happen, particularly as the business was spending aggressively for a long time to achieve huge growth.
Nowadays, Netflix is a sign of financial prowess, indicated by its ability to produce sizable profits. The company generated a 21% operating margin last year, with management forecasting a 25% margin in 2024. These figures are up considerably from the operating margin of 10% reported in 2018.
Since Netflix's costs are largely fixed, the business has been able to boost profitability as its sales base has increased. It's not difficult to envision a scenario where the bottom line expands faster than the top line for the foreseeable future.
Even more impressive, Netflix is now registering meaningful free cash flow, to the tune of $6.9 billion last year. This has allowed the leadership team to institute a stock buyback program. In the past five quarters, $8 billion of outstanding shares were repurchased.
Walt Disney, perhaps Netflix's most notable direct competitor that has the brand recognition and scale to compete, has struggled to get to profitability in its streaming operations, despite having 118 million subscribers in the core Disney+ service. Last fiscal quarter (Q2 2024, ended March 30), the streaming segment reported just $47 million in operating income. But it's nowhere close to Netflix in this regard.
Investor perspective
There's no denying that Netflix is a tremendous business. Its culture of innovation and disruption has helped it upend the worldwide media industry. And it's not only still growing revenue at a healthy clip, but it's also bringing in big profits.
However, investors looking to buy the stock need to consider that it trades at a forward price-to-earnings ratio of 34.5 right now. That's certainly not as cheap as it was in the summer of 2022 when it traded at a multiple of 16.1.
However, I think Netflix still looks like a smart investment candidate. It has the chance to outperform the broader market indexes in the long run.
To be clear, though, future returns aren't going to resemble the past. That perspective should help keep expectations in check before you add the company to your portfolio.
