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Better Buy: Netflix Stock or the Entire S&P 500?

By Robin Hartill, CFP® - Feb 3, 2021 at 8:05AM

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Spoiler alert: Netflix wins this one, hands-down.

If you'd bought $10,000 worth of Netflix (NFLX 0.58%) stock a year ago, your investment would be worth $15,300 today. Had you put the same $10,000 investment into an S&P 500 index fund, you'd now have about $11,500. 

Netflix was clearly a winning stay-at-home stock in 2020. But people have been stuck at home watching TV for nearly a year. Surely we'll all be eager to do something else as COVID-19 vaccines become widespread. Plus, practically everyone you know already subscribes to Netflix. There's also growing streaming competition from rivals like Disney+ and Amazon (AMZN -0.03%) Prime.

Yet in spite of all that, Netflix still has plenty of room to grow. Here's why Netflix can continue to deliver blockbuster returns compared to the S&P 500 index.

A man holds a remote control while watching streamed content.

Image source: Getty Images.

Why Netflix still has plenty of growth ahead

If Netflix increased your price by $1 or $2 a month, would you cancel your subscription in protest? Probably not. Netflix gets that. It knows that any subscribers it sheds from a price hike will be mere teardrops in the tsunami of revenue it can generate. Netflix will take in an estimated $2.34 billion of additional revenue in 2021 from its latest price hike, which will add $2 to the cost of a top-tier plan in the U.S. Compared to the byzantine practices of going to a movie theater or ordering a cable package, Netflix realizes it's a bargain.

In the fourth quarter, Netflix blew past the 200 million subscriber mark. But believe it or not, the picture is still bright for long-term subscription growth, even though CEO Reed Hastings warned during the Q4 earnings call that growth is expected to slow down drastically in the short term. But fewer than 40% of those subscribers live in North America. About 83% of Netflix's new paid subscriptions came from outside the U.S. and Canada in 2020, with Europe, the Middle East, and Africa accounting for 41% of new subscriptions. As over-the-top access increases throughout the developing world, Netflix's subscriber base will soar.

Despite all the hype about competition from Walt Disney's (DIS 3.33%) Disney+ and Amazon's Prime, Netflix remains the streaming service that eats up the biggest amount of our time. According to a J.D. Power survey, households reported spending 9.5 hours per week on average watching Netflix, compared to 7.6 hours for Hulu, 5.8 hours for Amazon Prime, and five hours for Disney. As Fool contributor Adam Levy pointed out, about half of American households have four or more streaming services, and we spent 24% more in December on streaming services compared to April. So there's clearly plenty of room for Netflix and its competitors to grow their slices of the pie.

Even more good news for shareholders: After borrowing about $16 billion to fuel its meteoric growth over the past decade, Netflix has reached the point where it can fund its operations and start chipping away at its $10 billion to $15 billion debt.

Should you bet on Netflix over the entire S&P 500?

This isn't really an either-or question. Before you start investing in individual stocks, you'll want a diversified portfolio because investing in any single company is inherently risky compared to investing in the overall stock market. The easiest way to build a diversified portfolio is by investing in S&P 500 index funds. So investing in Netflix should only come after investing in the entire S&P 500.

Netflix's growth may slow down, but it still has the potential for the kind of outsize returns the S&P 500 can't deliver. But the S&P 500 offers the stability no individual stock can provide. As long as you've already invested across the stock market, Netflix is a winning addition to your investment portfolio


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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$187.44 (0.58%) $1.09
The Walt Disney Company Stock Quote
The Walt Disney Company
$105.83 (3.33%) $3.41, Inc. Stock Quote, Inc.
$2,151.14 (-0.03%) $0.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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