The trillion-dollar milestone is one that any business would be fortunate to surpass. Only a handful of companies can claim the achievement. When it does happen, shareholders, especially the early investors, are handsomely rewarded through the rise in the stock price required to get to that point.
Netflix (NFLX 1.74%) pioneered the streaming content industry. As a result, it has grown to a market capitalization of $150 billion as of this writing. That's a long road to travel to $1 trillion. Let's look at its chances for achieving the feat by 2030.
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A business designed for growth
As the leader of the streaming industry, Netflix boasts 222 million subscribers. That was 8.9% higher than the same time the previous year and good enough for the lead among competitors. Subscribers are the key to Netflix's flywheel. The revenue generated from them flows to content creation, which retains existing customers and attracts new ones simultaneously.
Subscribers, and the revenue that flows from them, have also become a competitive advantage. Netflix spent $17 billion creating new content in 2021 and was still profitable on the bottom line. In 2022, that figure can grow even more prominent.
Moreover, in recent years, Netflix has been allocating more of its content budget to original productions. This means the content stays with Netflix permanently. This is another considerable advantage because content theoretically has an infinite shelf life. People are still watching movies made two, three, and four decades ago, and their creators are still generating revenue and profits.
What's more, the business model is built on the excellent potential for scale efficiencies. Between 2012 and 2021, Netflix's operating profit margin has expanded from 1.4% to 20.9%. It doesn't cost Netflix any more money to show its films and series to an additional 20 million people. So when it adds subscribers, incremental costs stay relatively flat, and the revenue flows to the bottom line.
Netflix's chances are hitting a trillion-dollar market cap
As of this writing, Netflix stock is trading at a price-to-sales ratio of 5.2. Keeping that multiple constant, Netflix would have to boost revenue to $200 billion annually by 2030 to hit the $1 trillion target. Starting from its $30 billion in 2021, Netflix would need to grow its revenue by a compound annual rate of 23.5% for nine years to hit $200 billion. This is not an impossible task, considering it did 24.9% in the previous decade.
To make our prediction more robust, let's also calculate its chances using its price-to-earnings multiple of 29.43. Keeping that multiple constant, Netflix would need to boost earnings to $34 billion by 2030. Starting from its 2021 of $5.1 billion, Netflix would need to grow profits at a compound annual rate of 23.5% for nine years. Again, not improbable, considering Netflix has compounded earnings at a 34.2% in the last decade.
So using both a revenue estimate and an earnings estimate, Netflix's chances of hitting a trillion-dollar market cap in 2030 are pretty good.
