What Kind of Returns Should Netflix Shareholders Expect Going Forward?

Since it went public in 2002, few stocks have matched the returns of Netflix (NFLX -6.98%) stock. During these almost 20 years, it's a 570-bagger, turning a $10,000 investment into $5.7 million. And for Fool contributors Danny Vena and Jason Hall, investing early in this stock greatly improved their personal financial situations.

Danny and Jason talk with fellow contributor Jon Quast about Netflix stock in this clip from Motley Fool Backstage Pass, recorded on Nov. 1. One thing they both agree on is that Netflix likely won't generate the same returns over the next 20 years. However, both see  more upside for the streaming company as it continues its international expansion.

Danny Vena: Anybody who has followed The Motley Fool, followed my writing, knows that Netflix is one of my largest positions. In fact, it was my largest position, bar none for a number of years. In fact, at one point Netflix had grown to about 22% of my portfolio. By adding around it, by investing every month, and by a couple of other stocks, which we're going to talk about later in the show, have grown so exponentially that now they compete with Netflix for the one, two, and three position depending on what day or what week it is or how earnings went.

Really I wanted to go back to my initial investing thesis for Netflix because that colors my investing thesis going forward, and if you go back to 2007, when I first invested in Netflix, August of 2007, and it was the very first stock that I invested in when I joined The Motley Fool. I was a satisfied customer. I was one of those people that had cut up their Blockbuster video card, and left it on the counter at the store. One of the things that Jim Mueller, TMFTortoise, was following back in those days was how quickly Netflix was growing in the Bay Area, which was its first market. The company had gotten to at that point somewhere in the neighborhood of 35% penetration, and the argument was, if it could get to 35% penetration in the bay area, what would happen if it got to 35% penetration in the state, and eventually in the United States. That made a pretty compelling argument for me because back then people, were only beginning to adopt the little red envelope, and have DVDs delivered to their houses by mail.

Now, we've switched over from little red envelopes to streaming video, but the argument is remarkably the same. At this point, depending on which analysts you'd listen to, Netflix has somewhere between, say, a 40%, and 50% penetration in the world. But it's still growing. It's still growing in markets like Latin America, and Asia Pacific. It's very heavily penetrated in North America, but it's still also growing in Europe, and Eastern Europe.

My argument for Netflix is, this is a company that I am very bullish on. I think the company has done a remarkable job of going from burning cash to generating cash. They've shown just what will happen if they just switch gears quickly, which they did during the pandemic, and all of a sudden, Netflix was generating cash.

I'm going to say that I think Netflix still has a remarkably long runway ahead. We're certainly not going to see the type of gains that we have seen, and in my case, for the first position that I bought back in 2007, that's 28,000% gains, and my overall position is up about 4,500%. I think Netflix still has a long way to go. But I'd like to hear why you guys ranked it the way you did.

Jason Hall: Jon go first.

Jon Quast: I ranked it where I did because this isn't a company that I follow all that much. Personally, I'm not interested in Netflix for personal reasons, and so I haven't invested in it, and I don't follow it very closely.

However, in the few times that I have looked at Netflix, I mean, unbelievable, undeniable business fundamentals, the cash-flow generation, the penetration that it's experiencing, the user adoption, all of those things are undeniable. I think I ranked this one pretty middle of the pack. Definitely see more upside case for Netflix. Not a company that I follow very strongly so I didn't rank it as high as some of the others on the list. Jason.

Hall: Yeah. Danny, did you know that Netflix helped make the down payment on my first house?

Vena: I didn't specifically know that, but I am certainly not surprised.

Hall: Yes. Here's the funny thing about it, this was the first house we bought, it was $385,000. In Southern California that was actually a starter home. Starter homes now are like $600,000 in Southern California, but here's the point, the down payment we put down was relatively small. If I had have kept the Netflix that I liquidated to make the down payment, it would've bought that house [laughs] . There's an argument that it was a mistake to liquidate it. I still don't think that was the case because I used it for the reason that I invested, right. We had a long-term goal and the timing made sense to use that as part of it, to help buy the house.

Why did I rank it as low as I did? Mostly out of spite for where you ranked Tanger Factory Outlet. [laughs] I'm kidding.

I think the challenge that I keep coming back to with Netflix is, yes Jon, you called it. The economics are incredible, the margins are good. The company has gotten to a point, at a scale where it doesn't have to raise outside capital to fund new programming to continue to grow. It's at a point where it still needs to spend a ton of money to do it, to continue to grow, but it can use the funds from its own operations its own cash-flows, largely to do that, and that's a great position to be in.

At a $300 billion market cap, I continue to struggle with, even with the international growth opportunity being pretty tremendous. What we've seen with a lot of other businesses as they expand internationally, the economics aren't quite as good. The margins can still be good but the revenues you can generate, they're not as strong. The average revenue per user opportunity tends to be substantially smaller. I think that's one of the challenges Netflix is going to go deal with, even as it continues to expand, it's just not going to grow at the rate that it is. I think there's a ton of growth that's already priced in right now. Wonderful business. Over the next five years, I just think every other stock on this list except for one, has a probability of being a better investment.