One stock that has managed to buck the recent sell-off in the Nasdaq is streaming and entertainment giant Netflix (NFLX +0.13%). One of the catalysts fueling Netflix shares at the moment is an ambitious plan by management to reach a trillion-dollar valuation by 2030.
According to a recent piece in The Wall Street Journal, Netflix's leadership has outlined a detailed plan to boost subscriber growth and scale its advertising business over the next five years. Let's explore how Netflix can achieve management's targets, and then look at the math behind the company's forecasts to help determine whether a trillion-dollar valuation seems reasonable.
NASDAQ: NFLX
Key Data Points
The evolution of Netflix from basic streaming service to entertainment empire
It wasn't too long ago that Netflix primarily served as a digital catalogue of licensed television series and movies. And while the platform still features fan favorites from other studios, Netflix has spent the last decade investing in original content to differentiate itself from legacy media businesses. The strategy has paid off with incredibly popular titles such as Stranger Things, Wednesday, and Squid Game attracting subscribers to its service.
Given the success of its original content, Netflix has decided to take a page from Walt Disney's playbook in the form of immersive experiences. While nothing will truly rival the magic and scale of Disney World, Netflix is planning to offer its own unique form of enchantment through Netflix House. Netflix Houses will feature replicas of sets and scenery from some of the company's most popular shows, allowing fans to connect with series and characters beyond the TV screen.
Netflix has also increased its live sports programming. Some of the company's latest trials in the sports arena include a boxing match between YouTube sensation Jake Paul and famed boxing legend Mike Tyson, as well as a live broadcast of NFL games on Christmas Day.
Image source: Getty Images.
Breaking down the math behind the trillion-dollar valuation
While the plans to scale Netflix make sense on a fundamental level, what do the financial figures look like behind the company's five-year forecast?
Per the company's five-year plan, Netflix's revenue is forecast to reach about $80 billion with operating income of about $30 billion by 2030. To put this into context, this assumes the company doubles its revenue from last year while simultaneously expanding operating income nearly threefold.
Netflix's original content, combined with newer offerings like live sports, should keep customers coming to its platform. Meanwhile, the company is expanding its ability to give advertisers access to its massive customer base -- providing the company with another high-growth, high-margin business. For these reasons, it's not hard to believe that Netflix can expand its top line while profitability also rises.
With that said, how realistic is a valuation of $1 trillion? To help answer that, consider two different valuation multiples.
Data by YCharts.
The top chart above shows Netflix's price-to-sales (P/S) ratio over the last 10 years. Assuming the stock can maintain its current P/S multiple of 11, applying that to the 2030 revenue forecast of $80 billion would imply an eventual market capitalization of $880 billion.
Alternatively, looking at Netflix's ratio of market cap to operating income (the bottom chart), applying the current multiple of 37 to Netflix's 2030 operating income target of $30 billion would result in future valuation of $1.1 trillion.
Netflix is a compelling buy-and-hold stock for the long term
The forecasts above are very simple, and the reality is these valuation metrics will almost certainly change over the next five years
That said, there is an argument to be made that Netflix could see an expansion in these multiples over the coming years if the company can deliver on its growth forecast. By 2030, Netflix could be a vastly different enterprise featuring a fast-growing, profitable advertising business complemented by an industry-leading streaming platform and entertainment venues.
While I'm personally confident that Netflix will reach a trillion-dollar valuation by the end of this decade, investors shouldn't get too caught up in the specifics of the company's exact price target five years from now. What's most important is the long-term potential of the stock, and that's what makes Netflix a compelling buy-and-hold pick.
