There are scarcely any investors that do not know about Netflix (NFLX 2.44%). The streaming pioneer has commanded attention through its remarkable performance over the years. If you're interested in investing in Netflix, developing more than a general understanding of it would be prudent.
Indeed, savvy investors probably know at least these three crucial things about Netflix: It has reached a massive scale in subscribers. Subscriber growth is slowing down. The business model delivers excellent economies of scale. Let's look closer at each factor below.
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1. Netflix boasts massive subscriber totals
The streaming content pioneer is the undisputed industry leader. Netflix amassed 222 million streaming subscribers as of Dec. 31, 2021. That was 8.9% higher than at the same time the year before. The totals are enough to give it a comfortable lead. No other provider has more than 200 million streaming subs.
Customer additions surged at the pandemic onset when billions of folks were trying to stay home as much as possible to avoid contracting COVID-19. In 2020 alone, Netflix attracted more than 36 million new subscribers.
2. Subscriber growth is slowing down
Unsurprisingly, the momentum gained at the onset of the pandemic is slowing down. Billions of people have gotten vaccinated against COVID-19, and world governments are easing business restrictions, allowing people to return to a degree of pre-pandemic lifestyles. As a result, demand for in-home entertainment is falling.
Meanwhile, several media companies realized the value of offering a streaming service to their customers during the pandemic and launched one of their own. After nearly a decade of little competition, Netflix now faces many deep-pocketed rivals. To make matters worse, most new entrants are offering their services at lower prices than Netflix.
The combination of slowing viewership interest and rising competition hurts Netflix's subscriber growth prospects. Indeed, management's forecast of 2.5 million additions in the first quarter would be its lowest acquisition in Q1 in at least five years.
3. Netflix's business model is foundationally built to scale efficiently
Netflix's business is built to take advantage of economies of scale. It might spend $100 million to produce a movie, but it will not cost Netflix much more money if 25 million people watch or 50 million people watch the film. In that way, each incremental subscriber's contribution to revenue flows more significantly to the bottom line. That is, of course, after it reaches a scale large enough to recoup its costs for creating and buying content and other expenses it must incur to run the business.
Netflix's efficiencies in scale are perhaps best demonstrated when looking at its operating margin, which rose from 4.3% to 20.9% from 2016 to 2021. In that same time, revenue has grown from $8.8 billion to $29.7 billion. Investors can look forward to continued margin expansion for Netflix as it builds on its massive subscriber and revenue base.
Fortunately or unfortunately, depending on if you are a shareholder or potential investor, the market has been more focused on Netflix's slowing subscriber growth, sending the stock price down 46% in January 2022 off its highs from last year. For potential investors, that's an opportunity to scoop up shares of this excellent business at a bargain price.
