The stock market is a proven wealth generator over the long term, even for conservative investors who buy index funds. But some individual stocks like Netflix (NFLX -0.63%) have delivered an absolute fortune to investors who were game enough to bet on them early.
Netflix was founded in 1997. It went public five years later in 2002 with a market valuation of $309 million. The company is now worth $215 billion on the back of its world-leading streaming platform.
Investors who bought Netflix stock at its initial public offering (IPO) and held until now would be sitting on a gain of 45,332%. In other words, a mere $2,210 invested in 2002 would be worth more than $1 million today!
In fact, Netflix has created so much value that management has opted for two stock splits -- one in 2004, and another in 2015 -- to ensure the stock remained accessible to smaller investors.
Image source: Netflix.
From the brink of failure, to global dominance
The Netflix story is legendary. In 1997, its founders wanted to disrupt the video rental industry by mailing movies to customers in DVD format. The widespread adoption of the internet enabled customers to order online, so they no longer had to visit brick-and-mortar stores like Blockbuster.
But disaster struck in 2000 when the dot-com bubble burst, sending the technology sector plunging. It sank hundreds of early stage start-ups, and Netflix was still a private company, so it was incredibly hard for it to access funding.
Its founders approached Blockbuster and offered to sell Netflix for $50 million -- a deal which Blockbuster famously rejected.
Netflix pulled through the crisis, and its service continued to gather momentum. By 2007, it was leaning on the internet even further by offering customers a streaming service, which eliminated the need for DVD discs entirely.
It was a game changer, and it laid the groundwork for what Netflix is today: The world's largest streaming platform, with 247 million subscribers. Blockbuster, on the other hand, declared bankruptcy in 2010.
Cheaper subscription tiers are driving new growth
Netflix has faced slowing subscriber growth over the last couple of years. Most people who are likely to use Netflix have already joined, so the company has to work a little harder to grow its addressable market.
It has cracked down on password sharing to monetize the estimated 100 million households around the world that are using Netflix for free through a friend or family member's account. Now, paying account holders can add additional members for just $7.99 per month -- while it's much less than the $22.99 per month for the Premium tier, it's better than making no money at all.
Netflix also launched a new $6.99-per-month tier supported by advertising, which is designed to capture lower-income households. Management says the ad tier already generates the same amount of revenue per subscriber as the Standard tier, which is $15.49 per month -- so while it's cheaper at face value, advertising is contributing a significant amount of revenue.
The combination of the ad tier and the crackdown on password sharing has driven an acceleration in subscriber growth. In the 2023 third quarter (ended Sept. 30), subscribers grew by 10.8% year over year, which was the first double-digit percentage increase since early 2021.
Netflix has become a cash-generating machine
With 2023 almost in the books, Netflix is on track to deliver $33.5 billion in revenue for the year. That will mark a 220-fold increase from its IPO year in 2002, when it generated $152 million.
But Netflix's bottom line is the real story. In 2022, Netflix delivered $4.5 billion in net income, which translated to $9.95 in earnings per share. That's on track to grow by 10.8% in 2023 to $11.03 per share. But Wall Street forecasts $14.41 in earnings in 2024, which means growth could accelerate to 30.6%.
Netflix faces growing competition with at least 61 other streaming platforms boasting 1 million subscribers or more, but it remains the only major stand-alone provider generating a consistent profit. Disney's Disney+ streaming service has over 150 million subscribers, but it continues to lose money.
Disney committed to slashing its content budget by over $3 billion earlier this year, and it will cut out a further $2 billion in 2024. While it will move Disney+ closer to profitability, the platform might become less appealing to members for a lack of new shows and movies.
Netflix could create more millionaires over the long term
To be frank, the best gains in Netflix stock are in the rear-view mirror. It's unlikely $2,210 invested today will grow into $1 million over the next 21 years, the same way it did over the last 21 years.
The larger Netflix gets, the harder it is to maintain the same levels of growth. That doesn't mean the company can't mint new millionaires over the long term, but investors will likely have to outlay a larger sum of money to start with.
For example, a $200,000 investment could become $1 million over the next 20 years if Netflix grows its annual revenue by 8.4% per year and maintains its current price-to-sales valuation. It's certainly possible, given that Netflix has grown its revenue at a compounded annual rate of 29.3% since 2002 -- although it is currently growing well below that long-term trend.
With that said, there is potential for a growth acceleration in the future. Streaming only represents 37.5% of television time in the U.S., so the industry still has plenty of room to expand. Plus, as I mentioned earlier, some of Netflix's key competitors are pulling away, which could leave the company with a larger market share in the coming years.
Netflix's penetration also remains incredibly low in parts of Europe, and in populous developing markets like South America and India. Those regions might be key to the platform crossing 1 billion subscribers over the very long term, which could certainly help Netflix stock mint new millionaires.
