In the last decade, the Nasdaq Composite Index has returned 311% for investors, a figure that includes dividends. That's a strong gain, but some businesses have fared much better.
Netflix (NFLX +0.13%) has been a major winner. The streaming stock is up 835% since Feb. 2014, turning a $1,000 investment into a whopping $9,350 today.
Let's take a closer look at this streaming pioneer's past before considering if Netflix makes for a smart investment today.
Scaling up rapidly
The key factor that drove Netflix shares to new heights was the company's underlying growth trajectory. As of Dec. 31, the business had 260 million subscribers in 190 countries. The customer count is almost sixfold higher than the 44 million members Netflix had at the end of 2013. Despite the pandemic pulling forward demand, customer gains have been fairly consistent.
Netflix was able to scale up so rapidly on the back of broadband internet penetration, as well as the cord-cutting trend. Consumers find better value and convenience in streaming TV, a shift that the management team realized early on. According to CFO Spence Neumann, there are 1 billion broadband-enabled households worldwide (outside of China, where Netflix isn't available), providing a massive opportunity for the growth to continue.
While Netflix's business model of creating or acquiring content and distributing it over the internet hasn't changed, what has evolved is the leadership team's strategy. Netflix has not only cracked down on password sharers but also introduced a cheaper, ad-supported tier, both moves that have boosted subscriber numbers in recent quarters.
NASDAQ: NFLX
Key Data Points
Focus on financial durability
In order to achieve monumental growth, it was and still is required of Netflix to spend huge amounts, tens of billions of dollars per year, on content to create greater choices for its viewers. Consequently, the bears were convinced that Netflix would never be able to stop burning cash.
Things have changed thanks to Netflix's scale, represented by $34 billion of revenue in 2023. The company reported positive free cash flow (FCF) of $1.6 billion in 2022 and $6.9 billion last year. In 2024, executives forecast FCF to total $6 billion.
This is an extremely encouraging development because it means Netflix no longer needs to access the capital markets to fund its operations. This is despite the fact that $17 billion will be spent on content this year. Netflix is able to spread out these fixed costs over a bigger user base than any of its rivals, which gives it an advantage in the industry.
The business has even started to return capital to shareholders. In the last 12 months, $6 billion of outstanding stock was repurchased, with $8.4 billion remaining under the current authorization. Today, Netflix looks like a more financially sound enterprise.
Time to buy?
Netflix's historical performance is nothing short of spectacular, even though it has been a volatile ride for the growth tech stock. Investors must view the current situation from a fresh perspective before deciding if it's time to buy shares.
In my opinion, it's totally reasonable to assume that growth will slow down in the decade ahead. Netflix is getting close to saturation in its most mature markets, the U.S. and Canada. Competition is only going to intensify. And because this is a much larger company nowadays, the days of greater than 20% sales growth are likely a thing of the past.
But thanks to an expanding bottom line, shares don't look outrageously expensive. They trade at a forward price-to-earnings ratio of 35.2. Investors looking to own an industry-leading business that still has a bright future might want to take a closer look at Netflix right now. Just don't expect returns to resemble the past.
