Streaming pioneer Netflix (NFLX 1.23%) is a media giant and no stranger to investors. The growth stock has obliterated the broader stock market over its lifetime, returning more than 39,000% since its 2002 initial public offering.
It may no longer be the newest or flashiest name on Wall Street, but there is still lots of juice for investors to squeeze. Here are three reasons Netflix should be on your radar right now.
1. Unlocking growth with one simple rule change
Sharing passwords has become standard practice in the streaming era. Who hasn't borrowed a password from a friend or family member? This is a practice that Netflix largely turned a blind eye to for years because subscriber growth was still hot. But growth slowed as paying subscriptions crossed 200 million, so Netflix began blocking password sharing earlier this year.
The move has quickly proven wise. Since enforcing its new anti-sharing policy in May, year-over-year subscriber growth essentially doubled overnight. Paying subscribers grew 8% year over year in the second quarter, up from 4.9% in Q1. Subscriber growth further accelerated to 10% year over year in the third quarter.
NFLX Revenue (Quarterly YoY Growth) data by YCharts
The newly found membership boost bodes well for Netflix's overall revenue growth, which has steadily declined since the pandemic years. Management is guiding for 11% year-over-year revenue growth in the fourth quarter, accelerating from its low in early 2023.
2. Netflix has become a cash-flow machine
Companies can sometimes go a long time without making any money because they're actively reinvesting every profit dollar in the business to drive growth. Netflix did that for years, but free cash flow turned positive and has exploded higher in recent quarters. Admittedly, part of the reason for this is because of the writers' and actors' strikes that occurred this year, halting production on most shows and reducing Netflix's expenses significantly. But some of it is for other reasons that should continue.
From cash-flow breakeven as recently as 18 months ago, Netflix converted a robust 22% of its revenue into cash in the third quarter of this year.
NFLX Free Cash Flow data by YCharts
Netflix's biggest expense is producing content. Fortunately, the company should continue realizing operating leverage over time, as revenue keeps growing faster than expenses. In other words, Netflix can spend $10 million on a project and should make more money showing it to 200 million paid subscribers than if it had 100 million.
More content should attract more paying customers, a lucrative cycle ramping up as the company's user base approaches a quarter-billion members.
3. The stock is cheap for what you get
Shares of Netflix trade near their 52-week high, so it's understandable to assume that the stock is expensive. But that's not necessarily true. If you value a company based on its cash profits, Netflix is currently the least expensive it's ever been. The stock currently sports a free-cash-flow yield of more than 2.6%.
NFLX Free Cash Flow Yield data by YCharts
That valuation may become even more appealing over time. Netflix's revenue growth is headed back in the right direction, a good sign for future cash-flow growth. Management recently boosted its share repurchase program by $10 billion, exuding confidence as well.
Admittedly, the stock has rallied hard since third-quarter earnings, so investors shouldn't jump into Netflix stock (or any stock) all at once. Consider a dollar-cost averaging strategy to build an investment slowly at a blended average price.
