It's impossible to argue with Netflix's (NFLX 0.75%) unbelievable track record of compounding shareholder capital in the past. The streaming stock has skyrocketed 992% in the past decade and 16,160% in the last 20 years, crushing the broader indexes.
This monumental rise has created one of the world's most valuable enterprises. Netflix currently carries a market cap of $296 billion. But investors probably have their sights set on a bigger figure.
Can Netflix become a trillion-dollar stock by 2030?
An exclusive club
As of this writing, there are only seven businesses in this exclusive 13-figure club. Finding the next company that can get to that point way ahead of time can potentially lead to huge returns for investors.
The list includes well-known tech names like Microsoft, Apple, and Nvidia. All are leaders in their respective industries, whether it be enterprise software, consumer hardware and services, or developing graphics processing units for the AI boom.
As it relates to these traits, does Netflix belong in this category? I certainly think so. One could argue that Netflix is in an elite group when it comes to innovation and moving an industry forward.
Dominating the streaming industry
It's difficult to overstate just how successful Netflix has become. The company singlehandedly helped pioneer the streaming industry as we know it today. This makes it a category-creating enterprise.
After adding 9.3 million net new members in the first three months of 2024, Netflix currently has 269.6 million subscribers. This helped it generate $37.6 billion in annualized revenue in Q1, which supports the company's tremendous scale advantages.
With such a huge user and revenue base, Netflix is able to spend $17 billion annually on content. But while its rivals struggle to get into the black, this business is posting profits in remarkable fashion. Netflix's 2024 forecast operating margin of 25% is significantly higher than the 13% it reported in 2019. And the company is generating copious amounts of free cash flow.
While this is already a massive enterprise with a presence in 190 countries, there is still growth potential. Management believes that there are 500 million households globally (excluding China, where Netflix isn't available) with access to broadband internet. This provides a sizable runway to continue penetrating over time.
Setting the stage
In order for Netflix to get to a $1 trillion valuation by 2030, the company's market cap would have to rise more than threefold over the next six years, translating into a compound annual growth rate of 22.5%. There's no doubt that most investors would love to have this kind of return for their portfolios.
For some context, the stock has climbed about 27% per year in the past decade. It's reasonable to assume that the gains going forward are going to definitely come down when compared to history.
In fact, I think this is the probable outcome. That's why I believe Netflix won't get to the trillion-dollar club by 2030. While its revenue and earnings will probably grow at healthy rates in the foreseeable future, the stock's current valuation isn't as attractive as it once was.
Looking back 24 months ago to June 2022, shares traded at a price-to-earnings (P/E) ratio of 15.5. That's well below the current P/E multiple of 47.7. The elevated valuation certainly limits the chance to earn even higher returns.
This doesn't mean investors should avoid the stock, though. Netflix still looks like a business that investors should consider adding to their portfolios and holding for the next five or so years. Perhaps by 2035 the company will carry a market cap of $1 trillion.
