Let's start with an important caveat. Since investors have different goals, preferences, risk tolerances, and available capital, it's challenging to choose a stock that everyone would universally consider a smart buy. That said, among the many growth-oriented companies on the market right now, one which I feel looks particularly attractive is Netflix (NFLX 0.00%).
The streaming giant continues to deliver in a highly competitive entertainment industry, and the stock has excellent long-term prospects. Here's why investors would be wise to put $5,000 into Netflix today.
Another quarter with excellent results
For several quarters running, Netflix has been impressing Wall Street with its earnings results. The company's Q2 revenue increased 15.9% year over year to $11.1 billion, slightly ahead of its $11.0 billion guidance. Netflix's earnings per share (EPS) of $7.19 also beat its $7.03 projection, growing by 47% compared to the year-ago period. And there were plenty of other bright spots -- Netflix's free cash flow soared almost 87% year over year as well.
Image source: Getty Images.
One thing driving these strong results was member growth. Netflix recently increased its prices in the U.S. and several other markets. Yet, new subscribers are still coming in. That says a lot about the company's business. Netflix is the leader in streaming, and its brand name and massive library of content continuously attract new users while retaining existing ones. That strong brand name also gives the business a competitive edge and pricing power.
For the third quarter, Netflix is guiding for year-over-year revenue and EPS growth of 17% and 27%, respectively. Management also increased its full-year revenue outlook to a range of $44.8 billion to $45.2 billion, in part due to stronger than expected member growth.
Why the future is bright for Netflix
Netflix's brand isn't its only competitive advantage. The company's massive ecosystem of viewers grants it access to data it can use to produce new content (or license existing movies and shows) that its viewers will love. This leads to greater engagement as films spread through word of mouth and social media platforms, ultimately resulting in even more subscribers -- an excellent example of the network effect.
Since 2019, the streaming landscape has undergone a significant evolution with numerous new platforms emerging, including some created by leading companies in the media and technology sectors. Netflix has continued to thrive despite all that, after an adjustment period. The company has introduced a low-price, ad-supported tier, for example, and it continues to scale its advertising business.
Even with fears of an economic downturn swirling, the company's ability to grow its subscriber count while it raises prices suggests its customers aren't very price sensitive. If a recession does hit, that might somewhat impact demand for the company's services, but this wouldn't be the first time Netflix has navigated a tough macroeconomic environment. As the company's co-CEO, Greg Peters, stated during the Q2 earnings call, Netflix has been "historically pretty resilient in tougher economic times." Expect the same moving forward.
Streaming has already positioned itself as the future of entertainment. It is vastly superior to cable in that it offers the ability to watch shows or movies on demand on multiple screens at any time. That's why streaming has been gaining ground while cable is losing market share.
But old habits die hard. Millions of consumers are still tied to cable, helping to keep the industry alive in the U.S. That market will continue to shrink over time, though, and that remains a massive long-term opportunity for Netflix.
As for the stock, Netflix's forward price-to-earnings ratio is just under 45 as of this writing. That sits well above the average of 19.9 for the communication services sector.
However, Netflix has earned the premium given its market leadership, outstanding track record, and attractive long-term prospects. Perhaps the stock may be somewhat volatile in the short term, but over the long term, this won't matter too much. Those intending to hold Netflix for the next five to 10 years should still consider buying the stock, even at current levels. Netflix is a top pick for a broad swath of investors, and with $5,000, you can get a bit more than four of the company's shares as of this writing.
