There are some businesses out there that have absolutely crushed it for their shareholders. Netflix (NASDAQ: NFLX) is the perfect example of a wildly successful investment.
In the past 20 years, this streaming service stock has skyrocketed more than 31,100% (as of Aug. 16). This means that a $10,000 investment in August 2004 would be worth $3.1 million today. That’s a much better gain than the S&P 500 or Nasdaq Composite index.
Let’s take a look at Netflix’s monumental rise before figuring out if the stock is a smart investment to make today.
Netflix is a category creator
There are very few businesses out there that have become so powerful by actually creating a new market. Netflix deserves credit for spearheading the streaming movement and helping accelerate the demise of cable TV.
The company first launched its service in 2007. And since then, it has been able to rapidly grow its revenue and subscriber base. In the past decade, sales have soared about 640%. You’d struggle to find businesses with this kind of expansion.
In the early days, Netflix was a far superior solution in the eyes of consumers than the traditional cable-TV bundle. People could watch whatever shows and movies they wanted, when they wanted, and how often they wanted. Time was no longer a constraint on viewing. This propelled Netflix into the global media powerhouse that it is today.
In the streaming industry, scale means everything. Netflix’s first-mover advantage is precisely why it has become the dominant player in the market. It has 278 million subscribers and generated over $36 billion in trailing-12-month revenue. This affords it the ability to spend about $17 billion in cash on content, while also being extremely profitable.
Netflix is expected to report an operating margin of 26% this year. That would be a huge improvement from 14% five years before in 2019. That’s a clear sign of a scalable business model. Fixed expenses, mainly for content, are better leveraged as sales rise over time.
And thanks to its ability to generate billions each year in free cash flow, Netflix is now very financially sound. Management even conducts share repurchases to return capital to investors.
The future of Netflix
Netflix might have been a fantastic investment in the past, but investors should view the current situation with a fresh perspective. To be clear, this is a more mature enterprise, so the growth is likely to slow in the years ahead.
Management believes that there are still 500 million smart-TV households that aren’t currently Netflix customers. While that’s a huge addressable market, bringing them on won’t necessarily be as easy task. These people likely need more convincing to sign up for a Netflix membership than the early streaming adopters.
To its credit, though, Netflix is testing new waters to drum up growth. In the past few years, it has gotten into mobile gaming, launched an ad tier, and cracked down on password sharing. Plus, it finally entered the live entertainment area, as deals with TKO and the NFL clearly demonstrate. I’d guess that the business will acquire more professional sports rights in the years ahead.
These recent initiatives are needed because the industry has never been more competitive. There are so many companies all vying for consumers’ attention, so it makes sense that Netflix is doing what it can to stand out. The environment is more challenging today than it was a decade or more ago, to put it lightly.
As of this writing, Netflix shares trade at a price-to-earnings ratio of 43. I’m confident that forward returns won’t resemble the past. But investors who prioritize valuation less so than quality might want to consider adding the stock to their portfolios.
Should you invest $1,000 in Netflix right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool recommends TKO Group Holdings. The Motley Fool has a disclosure policy.
1 Spectacular Stock That Turned $10,000 Into $3.1 Million in 20 Years was originally published by The Motley Fool
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