Netflix (NASDAQ:NFLX) has been very good to investors so far. The stock has provided a 62% return over the last 52 weeks, 714% in five years, and a hair-raising 4,300% gain in a decade.
The good times are not drawing to a close, either. Netflix is the largest and oldest component of my personal investment portfolio, and I would buy the stock today if I didn't already own it. It's a fantastic stock to own for the very long run, and I'm about to tell you why.
Here are seven great reasons to buy Netflix stock and never sell.
1. Always ready to change with the times
An oft-quoted explanation of Darwin's Origin of Species goes like this:
"It is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself."
The same is true for businesses, especially if you plan to own them for a long time. Being ready to change your business model at the drop of a hat is a hallmark of great long-term investments, and Netflix has this quality in spades.
What started as a simple pay-per-rental DVD service with a primitive version of the iconic red mailers soon became a game-changing subscription service instead. From there, Netflix moved on to provide the first serious digital video-streaming business -- included as a freebie with the standard DVD-mailing plans. Now the DVD and streaming services have separated, and Netflix has moved on to co-produce its own premium content.
This will not be the last stop on Netflix's ever-changing business model, either. I don't know what's next, but can't wait to find out.
2. In fact, usually leading that change
When Netflix started that DVD-by-mail subscriptions service, it was a completely novel idea. Blockbuster tried to copy it but failed, destroying its own balance sheet in the process. Retail giant Wal-Mart (NYSE:WMT) tried too, but ended up just backing out and selling its mail-order subscriber list to Netflix.
The streaming service was years ahead of similar plans from Hulu and Amazon.com (NASDAQ:AMZN). Netflix built that market from scratch, starting as a freebie before sufficient broadband speeds were broadly available.
Likewise, Netflix dipped its toes into high-quality content production with award-winners like House of Cards and Orange Is the New Black long before Amazon and other streaming rivals started playing the HBO game. This company doesn't sit around and wait for market changes to just happen -- it leads the charge whenever possible.
Sure, this progressive attitude adds risk to Netflix's business. But those well-planned gambles have played out beautifully so far, and I expect the winning streak to continue. These guys know what they are doing.
3. Quality management
Yeah, these guys. CEO Reed Hastings and content VP Ted Sarandos, just to name a few, have proven themselves to be top-shelf leaders. The service platforms they built have upended traditional entertainment systems more than once, and destroyed many would-be rivals along the way.
Hastings is running his business like the trained engineer he is, based on high-quality data and a great sense for tomorrow's evolving technologies. Sarandos adds a data-driven human touch to the building of an attractive content portfolio.
4. ...owning their mistakes
Netflix makes mistakes.
The most obvious example would be the ham-fisted Qwikster introduction in 2011, splitting the streaming service out as a completely separate business and rebranding the DVD service you knew and loved -- and charging a separate fee for each of these plans.
That shocker went over like steak sauce on ice cream. Hastings soon killed the Qwikster name, kept both of the separated services under the proper Netflix umbrella, and apologized for the mess he made. The company's subscriber counts and financial figures turned turbulent for a while, before settling back into massive overall growth.
Reed Hastings could definitely have handled this episode much better, but the final result was pretty much exactly what he wanted all along. Did you know that the Netflix DVD service now is known as DVD.com, managed through its namesake web address? The whole Qwikster plan has actually worked out, just a couple of years late and under a different name -- and largely out of the media spotlight.
5. Growing quickly
The U.S. streaming segment is still adding plenty of new subscribers, to the tune of 4.7 million net new customers in 2016. But the far bigger growth story today is found abroad. There, Netflix added 14 million new subscribers last year while covering nearly the entire globe in streaming services. The two divisions are nearly the same size at the moment, but international subscribers will soon outnumber the domestic customer list.
What's more, the overseas growth story has only just begun and will have legs for years to come.
6. ...at a crucial moment in time
At the same time, the global market is only just becoming ready for serious digital video services like Netflix. According to data (link opens PDF) from the International Telecommunication Union, more than half of the world's population is not yet using the internet -- but online access is exploding in places like Africa, Latin America, and underdeveloped parts of Asia.
Broadband access is still a rarity in Africa, reaching less than 1% of the continent's population today. Thanks to increased investments in mobile broadband networks, a consortium of African communications ministers hope to have broadband connections for 80% of the population by the year 2020. That's more than 1 billion people becoming potential Netflix users, just a couple of years from now.
It's the perfect time for digital businesses to set up shop worldwide, as Netflix did a year ago with Amazon Prime Video following suit a few months later. If you build a great service, the overseas customers will come.
7. One more thing -- and this is important
Netflix critics often focus on the company's narrow bottom line. Net margins stopped at 2.1% in 2016, a modest increase from 1.8% in 2015. Free cash flows are negative, and will remain so for the next couple of years. Content licenses can be expensive, especially on a global scale. In-house productions are even more costly, at least up front. As a result, Netflix plans to finance its operations mostly via raising new debt for the foreseeable future. For many investors, this lack of capital is a deal-breaker.
I would point out that debt is available at historically low interest rates these days, and many companies are selling bonds or taking out term loans for no other reason than to add leverage to their balance sheets at attractive rates. If there was a perfect time to take out some fresh debt, this would be it.
Moreover, today's massive cash expenses are expected to turn into profit generators a few years down the line. Hit shows such as Stranger Things and The Crown are expensive to make, weighing down the cash flow sheet right now. Unlike third-party content licenses, original production costs can't be treated as amortized costs over several years -- it's all cash, right up front. But Netflix will still own them five years from now, enjoying a large and growing subscriber base thanks to yesteryear's premium content choices even as the production bills fade into distant memories.
You gotta pay money to make money. Here, the cash payoff will come five years from now, or maybe more. Just another reason to hold on to your Netflix shares for a long time -- forever sounds like a good idea.