Netflix (NASDAQ:NFLX) has been an incredible stock, rising roughly 20-fold over the past decade. Its current market capitalization of $214 billion makes it one of the most valuable companies in the world.
Sales keep going up
From 2014 through 2019, revenue grew at a compound annual growth rate (CAGR) of 29.6%, driven by impressive subscriber growth.
The company went from having 74.8 million subscribers at the end of 2015 to almost 200 million today. As broadband internet became more widespread, Netflix was a compelling value for viewers seeking better entertainment compared to traditional cable television.
Sales figures continue to get a boost from the company's international expansion, which will be the key driver for membership growth. As of Sept. 30, 63% of subscribers were from outside the United States and Canada, a number that will rise as Netflix invests heavily in producing local-language programming.
There's one more important factor in the revenue chart: price increases. Netflix knows how valuable its service is, and it has not shied away from making customers pay more. Just last month, prices in the U.S. went up for its standard and premium plans. This follows multiple raises throughout recent years, but membership additions keep marching higher.
In 2015, operating margin (using earnings before interest and taxes, or EBIT) at Netflix was 4.5%, but has since been trending up, as shown below. For 2020, management estimates an 18% EBIT margin, showcasing the scalability of Netflix's business model.
The company is targeting a long-term trajectory of 300 basis points per year of margin expansion. This is significant, and it should certainly please investors who have waited for operating leverage to meaningfully kick in.
As Netflix spreads its fixed content costs across more and more subscribers, profits are expected to soar. What's more, the digital nature of its offering means it essentially costs nothing for the company to serve any additional customers. Expect the EBIT margin to continue rising in future years.
Valuation is actually attractive
With a high-growth stock like Netflix, it's no surprise that the valuation has historically been elevated. The P/E ratio today is certainly a far cry from where it was five years ago, but it's still higher than all the other FAANG stocks except Amazon.
But Netflix's earnings multiple doesn't accurately reflect the reality of its business. It spends billions every year on marketing and technology, outflows that it benefits from in future years as well as during the current reported year.
Generally accepted accounting principles (GAAP) require these intangible assets to be expensed through the income statement, which ultimately understates net income. Astute investors who have grasped the true essence of Netflix's business model will make the adjustment of capitalizing a portion of these expenses through the cash flow statement. What results is a more accurate representation of earnings, and therefore a very attractive valuation given the remarkable growth opportunity still in front of Netflix.
These three charts obviously don't provide the complete analysis of the Netflix story, but I think they do a good job at giving investors a high-level look at where the company has been and where it's going. I think the stock will be a winner for years to come, and investors would be wise to add it to their portfolios.