Netflix (NFLX 0.33%) has been a major market winner for a long time, as its stock has skyrocketed nearly sixfold over the past five years. With a market capitalization of $235 billion, Netflix's price-to-earnings (P/E) ratio currently stands at 87, which is high by any measure.
While the company's been the primary beneficiary of the shift to over-the-top (OTT) streaming, investors are wondering if the stock is too risky today, considering the many years of its outperformance and the competition that continues to heat up. Let's find out if this is the case.
Never let a pandemic go to waste
Although Netflix's business was already booming in the years leading up to the coronavirus pandemic, it certainly received an extra boost last year. After adding 78 million subscribers in the prior three years combined, the business added a whopping 37 million members in 2020 alone. The huge bump last year was certainly fueled by people stuck inside with nothing else to do.
Netflix is positioned well to continue its success in the future. Production on sets is back up and running in most regions, and the company has 500 titles that are in post-production or ready to launch on its service. Furthermore, Netflix announced it will release at least one new original movie every week in 2021.
While the business was forced to shutter production due to coronavirus restrictions last year, it still had a blowout year. And now it's back to aggressively launching new content, which will only bolster its position as the leader in streaming.
Competition was expected
While Netflix pioneered the streaming-entertainment category and now has over 200 million paying subscribers, it's no longer the only game in town. Several other offerings are vying for consumers' attention, and the most formidable opponent at the moment is Walt Disney's streaming service, Disney+. It amassed 87 million subscribers in 13 months, which is quite remarkable given how late the House of Mouse was to the streaming party.
Netflix investors shouldn't worry just yet, as its sheer size allows it to spend massive amounts on content ($39 billion over the last three years) that exceeds what any of its competitors can do. The sizable lead in members, coupled with the willingness to lay out cash to keep improving and expanding the service, will keep Netflix in first place.
The company's Q4 numbers showcase this strength amid the heightened competition. Revenue increased 21.5% from the prior-year period, and the operating margin was 14.4% during the three months.
What's more, management surprised investors by declaring that they believe Netflix will no longer require external financing to run its operations. They also think the business is close to being free-cash-flow positive and will consider utilizing share buybacks as a way to return capital to shareholders.
It appears the company is turning the corner financially and has therefore never been in a better position. For investors fretting over the future of Netflix, don't lose sleep! This is the time you've been waiting for.
Valuation isn't extreme
I mentioned Netflix's P/E ratio earlier, which would definitely turn away value-minded investors. But that was for the trailing 12 months. If we look at the forward P/E ratio of 54, it should hopefully ease shareholder concerns that the stock is too expensive.
Despite rising competition, Netflix remains the clear leader in streaming entertainment, an industry that's still exhibiting rapid growth worldwide. And although the stock has been one of the best to own over the past several years, I'm not concerned much about the price.
I don't think Netflix is a risky stock. Instead, it should be a part of investors' portfolios.