There are a handful of stocks that I would consider essential in every serious investor's portfolio. A couple of these elite stocks have earned permanent spots in my own stock holdings. And if I had to select a single stock that should deliver strong returns for the long haul, that's an easy choice. We are obviously talking about media-streaming veteran Netflix (NFLX 1.09%).
Yes, I know. Netflix is a one-trick pony, right? The company dominates the global video streaming sector with 209 million paying subscribers and a sector-leading annual content budget of roughly $15 billion. At the same time, a swelling tide of new competitors makes many investors wonder why they should be excited about Netflix, or even vaguely interested in the stock.
I have a few answers to that question. For one, Netflix co-CEO Reed Hastings likes to remind investors that the company actually competes against basically every leisure activity under the sun. Another video-streaming rival or two won't change the competitive landscape all that much if you consider board games, sleeping in on a Saturday, or uncorking some wine in good company as head-to-head competitors. In fact, more streaming options arguably validates the whole idea of the business model that Netflix pioneered more than a decade ago. When everyone else stops making fun of your game-changing ideas and tries to copy them instead, you're doing something right.
Netflix has a history of crushing long-established business practices with its own unorthodox ideas. The company pushed Walmart (WMT -0.10%) out of the DVD-mailing game many years ago, picking up the retail giant's subscriber list for a song. I don't really have to remind you what Netflix then did to the traditional video-store sector, right? From Movie Gallery and Hollywood Video to market leader Blockbuster, Netflix crushed all comers with its flexible service and low operating costs.
And then Netflix more or less abandoned the DVD rental market.
You might remember the Qwikster event as a massive public relations disaster, but that's not the whole story. Though poorly executed from a marketing point of view, the summer of 2011 was where Netflix laid the groundwork for the global media-streaming empire we see today. The company was not afraid to drop the red DVD mailers that killed Blockbuster and friends in order to focus exclusively on a more scalable digital media service.
The key component of a great long-term investment
The brief history lesson above shows that Netflix is a natural leader and innovator. When broadband internet connections started to be commonly available in the American market, Netflix was ready to make the leap into an essentially all-digital business. This new era of online entertainment won't last forever, but I expect Netflix to take full advantage of whatever comes next -- probably years before most of its closest rivals even consider dropping the streaming model that is working so well today.
That ultra-flexible approach to how the business should be run is exactly what I want to see in any true long-term investment opportunity. Market conditions can change in a heartbeat and I want to own shares of the companies behind the next sea change.
Netflix delivered a 1,420% return over the last decade and I am still convinced that the empire-building growth story has only just begun. If you think this company has already reached full maturity, I ask you to reconsider. Netflix accounted for just 7% of total TV time in America in June, according to data from Nielsen. There's a lot of traditional ground to cover before you can consider Netflix to be fully grown, and that's just in the TV-style entertainment sector. Don't forget about those board games, late naps, and wine bottles that Netflix users could choose instead.
So if I had to pick a single stock to own for the rest of my days, Netflix would be the one. It doesn't hurt that the stock also trades 13% below January's 52-week highs. Buying great companies at a big discount is one of my favorite pastimes, after all. Sorry about the lost Netflix-watching time, Reed.