Despite a stock price that has skyrocketed 67% this year, this company still has what I believe to be a long growth runway. Sales in its most recent quarter (which ended June 30) were up 25% from the prior-year period, and its market capitalization is now $243 billion.
As it continues to completely upend an entire industry and create a new entertainment category, 193 million monthly subscribers in more than 190 countries enjoy the TV shows, movies, and documentaries that this company makes available to them.
It's for these reasons and more that, if I could buy only one stock, it would be Netflix (NFLX 4.17%).
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The effects of the pandemic
This year will go down in history as one that is radically shifting consumer behavior. My own investing strategy has changed as a result to only investing in companies that are recession-proof and can do well and thrive in any macroeconomic climate.
Netflix checks the boxes here, with the company really performing well while the pandemic took hold. Worldwide shelter-in-place orders forced many people to seek new ways to entertain themselves, which resulted in Netflix adding close to 26 million new global subscribers in the first six months of this year. That's almost as many as the nearly 28 million subscribers the company added in all of 2019.
Although management has admitted that the "strong first-half performance likely pulled forward some demand from the second half of the year," it is obvious just how essential Netflix's service is to consumers. Investors should not expect mind-boggling membership growth to persist forever, but having a media pioneer like Netflix in your portfolio ensures that you are riding the cord-cutting trend.
A technology company
Another reason I would buy Netflix is that it defines what it means to be a technology company. Netflix is a disruptor. The company makes something possible that previously wasn't: watching TV shows and movies whenever and wherever the consumer wants. Therefore, it has figured out a way to digitize time, something that is essential to its linear TV competitors.
Netflix has three distinct advantages over the vast majority of other companies. For starters, it has close-to-zero costs when delivering its service to each new customer, who can sign up and begin watching in a matter of seconds.
Second, Netflix's service gets better over time. As more subscribers join and bring in more revenue, the company can spend more on content creation and technological enhancements, which improve its product. And third, it can theoretically serve everyone in the world because the service is delivered via the internet and the myriad ways it is accessible and not through dedicated network cables used by traditional cable companies.
It pays to be first
Some of Netflix's advantages are helping to widen its moat versus other streaming services and traditional cable TV companies. As the first mover in the streaming category, it has a much bigger subscriber base, which gives it a funding advantage when spending on content. As of June 30, Netflix had streaming-content obligations of $19.1 billion. While seemingly large, it is absolutely necessary for Netflix to spend this amount as it leads to more game-changing popular shows such as Ozark and Stranger Things, keeping viewers engaged. It's like the research and development spending at biotech companies, but Netflix can create multiple winners, versus just one breakthrough for a drugmaker.
A rich content catalog that improves over time leads to higher user engagement, which creates significant value for customers. Since 2016, Netflix has raised prices on its standard and premium subscription options twice, with no apparent long-term impact on subscriber growth.
Patience can pay off
As a long-term, buy-and-hold investor, the most important goal for me is to be right about the company's fundamental operations and that it is following through on those fundamentals consistently. Valuation definitely matters in that you do not want to overpay for a stock, but quality matters most over longer periods.
It is obvious that Netflix's current stock price indicates extreme optimism about the company's prospects, so the astute investor should wait for the right price or a potential dip. Patience is key here since it may take a while for any bad news surrounding the stock and company. But once the price is attractive, you know what to do.
