Media-streaming pioneer and award-winning content producer Netflix (NFLX +2.90%) will report fourth-quarter results on Tuesday evening. These quarterly updates often have market-moving powers, and that's especially true for Netflix's holiday-season results.
- Investors with long memories might recall the stock's 22% jump on the day after the fourth-quarter report for fiscal year 2011, which made it clear that the recent Qwikster debacle actually was a good idea.
- Six years later, Netflix investors enjoyed a 10% single-day jump as part of a 21% gain in four days, inspired by 8.3 million net new members in the early days of original content production.
- Fast-forward to 2022 for a darker twist on the same needle-moving powers, as Netflix shares took a 29% swan dive in the week following the Q4 2021 report. The gung-ho subscriber growth was nowhere to be found and management's guidance for the next quarter was dismal.
It's not always rainbows and butterflies; It's often compromise that moves us along. This powerful financial report can be a double-edged sword.
With another holiday-quarter report on tap, it's time to address a common question. Will Netflix ever join the elite club of trillion-dollar market caps? Rome wasn't built in a day and Netflix stands a long way away from that ambitious target, so let's give the company the rest of this decade to make that steep climb. Even so, what would it take to lift Netflix's stock all the way to $1 trillion by the year 2030?
Spoiler alert: It's a long road to a trillion dollars
As a longtime Netflix shareholder and regular table-pounder concerning the company's bright future, I would love to slap down a quick "yes" and move on to the next game-changing investor question. But that wouldn't be honest. I'm talking about a colossal jump here, from $212 billion to $1 trillion. That's nearly a fivefold gain, clocking in at a total of 370%.
I'll add another year to Netflix's trillion-dollar deadline by moving the goalpost to the end of 2030 instead of the January fireworks. Now I'm looking at a seven-year timespan. The compound average growth rate (CAGR) of that climb works out to 24.8%.
That's a high-octane speed burst with a nitro boost -- lasting for seven years. I'm sorry, but that's not a realistic target.
Exceptions to the rule
I'm not calling the trillion-dollar goal "impossible." Soaring gains like these are indeed possible, and some market-beating winners make it look easy sometimes.
For instance, semiconductor designer Nvidia (NVDA +3.75%) has posted a 65% CAGR over the last decade, thanks to a 228% gain (more than a triple) in the last year alone. The current artificial intelligence (AI) furor has been good to Nvidia investors, making the stock the fastest gainer on the stock market over the last year and the last decade.
84 companies have achieved a CAGR of 24.8% or more in the last 10-year period, according to data from Macrotrends. As it turns out, Netflix is on that list with a 26.3% average growth rate. As I said, it can be done.
Then again, most of Netflix's 10-year gains materialized between 2014 and 2020. Video-streaming services were young and wild and exciting back then and Netflix had few serious challengers. It's a different ball of wax today with slower growth, price-sensitive consumers, and a plethora of rival services. The stock's CAGR in that market-stomping 5-year span works out to 48.3% while the most recent five-year increase stops at 7.2%. The slower subscriber growth in 2022 had brutal effects on this stock chart.
NASDAQ: NFLX
Key Data Points
A more realistic path to $1 trillion
Tuesday's earnings report should clarify the company's progress with recently launched and upcoming business ideas, and the earnings call promises to be interesting. Whether this report sends Netflix's stock price to the basement or the moon, remember that it's just one step on a long journey. Management's commentary on the business plan is always more important than any of the financial metrics on tap.
What if I expect Netflix to execute its newfound profit-focused business plan with more steak than sizzle, giving the stock a market-beating CAGR of roughly 15% for the foreseeable future?
At that speed, Netflix investors would see a 166% return by the end of 2030. The market cap would stand at $564 million by then, assuming a constant share count. The recently approved $10 billion buyback program (and similar follow-on profit-sharing programs) could accelerate investor returns along the way, but would also shrink the market cap by the same amount, thus pushing my trillion-dollar goal further away.
The trillion-dollar mirage would materialize after approximately 11 years at this hypothetical growth rate. Will Netflix still be a media-streaming specialist in 2035? Well, nobody knows. The whole world may have moved on to some new entertainment technology you and I haven't even imagined yet. If so, Netflix could be an obsolete afterthought with a shrinking market cap -- or perhaps leading the charge into yet another brand-new market as it did with DVD mailers and digital streaming services.
Betting on Netflix is a vote of confidence in its ability to reinvent and adapt in an ever-changing digital landscape. I feel good about its chances to deliver robust shareholder returns over the next few years, but the future gets murkier in the next decade. Anyone who claims to have a clear view of the far future is probably trying to sell you something.
The company should reach that lofty trillion-dollar target someday, but probably not by 2030 and the trillionaire club will probably grow from a handful of members to dozens of names by then. If and when Netflix crosses this goal line, investors will be used to trillion-dollar market footprints -- just a normal Tuesday night on Wall Street at that point.
And that's alright. Wealth-building is a marathon, not a sprint, and Netflix looks prepared for a strong long-term run.
