Shares of Netflix (NFLX 1.15%) have gained 33% so far in 2017. That's an impressive boost on top of an already huge market cap, giving the stock an $81 billion market cap today. Netflix has become a big player in the entertainment industry.
Still, 2017 was more of a transitional period in Netflix's history than a truly game-changing one. Will the next year be one for the books?
By the numbers?
Calling anything "the best ever" is a tricky business. Netflix has enjoyed a few banner years in the stock market that look absolutely unbeatable today:
Data source: Yahoo! Finance. Chart by author.
The young DVD-mailing business posted its first full year as a publicly traded stock in 2003, and investors were intrigued by the game-changing notion of mail-order video rentals with no late fees. That year, Netflix's market cap started out at a measly $247 million. Buyout rumors flew far and wide, and short-sellers did spirited battle with the longs. The microcap scored a fantastic 456% return in 2003 -- followed by a 69% plunge the next year, as Blockbuster and Wal-Mart (WMT +2.25%) seemed poised to destroy the cheeky newcomer.
2010 would also be a difficult period to match. That was the year Blockbuster filed for bankruptcy, CEO Reed Hastings sparred with master investor Whitney Tilson about the value and dangers of short-selling Netflix stock, and the digital streaming service, which had launched not long previusly, started to earn its keep. Share prices tripled, setting the stage for a tumultuous and truly game-changing 2011: The stock plunged 44% due to the separation of the streaming and DVD services. Qwikster, anyone?
Image source: Netflix.
Digging deeper
So 2018 is unlikely to beat either 2010 or 2003 in terms of pure stock market gains. A 450% surge would give Netflix a $450 billion market cap, placing it among the 10 largest stocks on the market and making it the biggest entertainment stock by a wide margin.
Even bulls like yours truly would agree that this would be a downright silly valuation just one year from now. Make that ten years, and maybe we can talk. That's still a rosy estimate, though.
But 2018 will probably be a year to remember for different reasons. Here's what Netflix investors should expect to see next year:
- Netflix added 19 million net new subscribers to its streaming services in 2016. For 2017, that figure should increase to nearly 22 million. I would be shocked to see anything but another record in 2018 as well.
- Thanks to price increases and wider adoption of Netflix's higher-definition subscription plans, international revenues are growing much faster than the already-impressive customer gains. International streaming recently started to deliver positive contribution profits, two years after dipping so low as to reach a negative 20% contribution margin. Management has not set any specific margin targets for next year, but aims to "achieve steady improvement in international profitability and a growing operating margin as our success in many large markets helps fund investments throughout Asia and the rest of the world."
- Wider international margins will unlock much larger bottom-line profits. Again, we don't have any official targets for 2018, but Wall Street analysts generally expect Netflix to almost double its earnings. Earnings forecasts for 2017 currently stop near $1.25 per share, rising to $2.26 per share next year. The largest bottom-line haul in the company's history was $0.62 per diluted share in 2014.
- The deal that has provided domestic Netflix users with deep and current access to Walt Disney (DIS +1.34%) content runs out at the end of 2018 and Disney has chosen not to renew it. Netflix will spend next year preparing for the upcoming lack of high-quality Disney content, which means pouring even larger sums into its own movie and TV series production efforts. Before the pending Disney cancellation was announced, Netflix was aiming to spend roughly $8 billion on content in 2018, with over 25% of that budget earmarked for Netflix originals. Expect that production target to rise, given the Disney news.
So yeah, Netflix will surely set some new records in 2018. Share prices may or may not follow suit -- it's hard to pin down short-term reactions to long-term business trends -- but I remain confident in Netflix as a valuable investment over the next several years.
