In its 22 years as a publicly traded company, streaming giant Netflix (NFLX -0.20%) has delivered market-crushing returns and probably made many millionaires. However, it faces a very different competitive landscape than it did two decades ago. Further, it is now a much bigger company, which may limit its upside potential.
Despite these factors, Netflix remains an excellent long-term bet for investors, and the company once again demonstrated its potential during its latest quarterly update.
Progress on all fronts
Netflix has changed considerably to adapt to the evolving media landscape. It now offers a lower-priced ad-supported tier -- an option that top management had dismissed out of hand for years. It also cracked down on password sharing between people who don't live under the same roof, and begun charging primary account holders extra for sub-accounts if they want to keep sharing. However, Netflix's core strategy remains the same: Deliver high-quality shows to viewers.
It continues to do just that, at least if its first-quarter results are any indication. During the period, Netflix's revenue increased by 14.8% year over year to $9.4 billion. That's better than the 13.2% the company had projected. Netflix's paid memberships grew as well, landing at 269.6 million for the quarter, 16% higher than in the year-ago period. Some investors worried that the combination of its password-sharing crackdown and streaming fatigue would lead to a significant slowdown in subscription growth for Netflix. That isn't happening.
The company added 9.33 million new paid memberships in Q1, compared to just 1.75 million in the first quarter of 2023. Earnings per share grew by 83.3% to $5.28, while free cash flow of $2.1 billion was about 1% higher than in the prior-year period. Netflix's operating income and margin also saw strong growth. In sum, the company's Q1 performance was stellar.
Plenty more room to grow
Netflix's share price slid following its blowout quarterly report. Why? Some investors are worried about a significant change the company is making to its reporting methodology. Netflix will stop publicly reporting the number of paying subscribers starting in the first quarter of 2025. Management explained that at this stage of the company's life cycle, paid membership is no longer one of its most important indicators of growth. Despite the market's reaction to this news, this change isn't something long-term investors should worry about.
As management said, engagement on the platform is what matters most, especially now that the company displays ads in one of its subscription options. A great library of content leads to solid engagement, which in turn allows Netflix to create more shows based on viewership data, and the wheel keeps rolling. The good news is that Netflix still has plenty of room to run in the streaming market.
In March, the company accounted for 8.1% of television viewing time (not including mobile devices). The entire streaming industry accounted for 38.5%. Cable isn't dead yet, far from it. Netflix hasn't yet achieved its goal of replacing cable, even in the U.S., one of the markets where the transition toward streaming is the most advanced. Penetration in most other countries tends to be lower, and in some cases, much lower.
That's where Netflix's massive long-term opportunities are most visible. Here's another way to look at it: Younger people in the U.S. are more likely to say that they have never subscribed to cable. Demographic differences in cable viewership suggest that streaming's share of viewing time will increase as younger generations who grew up in the streaming era grow as a percentage of the population.
The question is whether Netflix can remain the leading streaming company. Given its brand strength, strong engagement (it routinely tops streaming ratings), and successful content creation strategy, everything points to Netflix holding its top position for a long time. That's why investors can safely add the stock to their portfolios.
