The S&P 500 (SNPINDEX: ^GSPC) is the most widely recognized stock market index in the U.S., made up of the 500 largest companies in the country. Thanks to the extensive reach of its component businesses, many consider it the most reliable measure of overall stock market performance.
To be included in the S&P 500, a company must meet the following prerequisites:
- Be based in the U.S.
- Have a market cap of at least $22.7 billion
- Be highly liquid
- A minimum of 50% of its outstanding shares must be available for trading
- Be profitable on a generally accepted accounting principles (GAAP) basis in its most recent quarter
- Be profitable, in aggregate, over the preceding four quarters
Netflix (NFLX +2.79%) has been a member of the S&P 500 since December 2010, but recently announced a 10-for-1 forward stock split. This is historically indicative of a company with years of strong operating and financial results, and Netflix certainly fits the bill.
Since its IPO in mid-2002, Netflix shares have soared 94,010% (as of this writing), as the company has been a pioneer and key player in the streaming industry. Those results aren't relegated to some dusty past, either. Over the past 10 years, Netflix stock has surged 939%.
Despite its robust gains, many on Wall Street believe there's still much more growth ahead. Let's look at the keys to Netflix's success and what the future holds.
From humble beginnings
Netflix started out as a DVD-by-mail business, disrupting the then-dominant video rental chains, such as Blockbuster (remember those?). True to its name, the company introduced a streaming video service called "Watch Now" in early 2007, giving birth to an industry.
At first, Netflix only offered movies and television shows created by others, but saw the writing on the wall and began to create its own content with the 2013 debut of House of Cards.
The company burned cash and amassed substantial debt to expand its video library, a model that many believed was unsustainable. However, this strategy proved prescient, as it gave Netflix a critical advantage and an insurmountable lead in the emerging streaming video space that remained for years. Furthermore, after years in the red, Netflix began to generate positive free cash flow in 2020 and never looked back.
For the third quarter, Netflix generated revenue of $11.5 billion, up 17% year over year, while its earnings per share (EPS) of $5.87 climbed just 9% -- but that requires context. The company has an ongoing dispute with Brazilian tax authorities and took a one-time charge of $619 million while the issue plays out.
If not for this one-time charge, EPS of $6.87 would have increased 27%. Furthermore, management noted it doesn't expect this issue to "have a material impact on our results in the future."
The company also offered a robust forecast. For the fourth quarter, Netflix is guiding for year-over-year revenue growth of 17% to $11.96 billion. This would result in adjusted EPS of about $5.45, an increase of 28%.
Netflix still has plenty of growth irons in the fire. The company continues to expand its video game offerings.
Netflix also joined forces with Hasbro and Mattel in what it called "unprecedented licensing partnerships" to create toys and games based on its wildly popular movie KPop Demon Hunters, which became a global phenomenon, becoming the most popular Netflix film of all time. It also spawned a chart-topping soundtrack that reached No. 1 on the Billboard 200. The company also continues to expand its video game offerings.
NASDAQ: NFLX
Key Data Points
Wall Street is still bullish on Netflix
Wall Street rarely agrees on anything, so it's noteworthy that the majority of analysts who cover Netflix believe there's still upside ahead. Of the 49 analysts who offered an opinion in October, 33 maintain a buy or strong buy rating, and none recommend selling. Furthermore, an average price target of roughly $1,347 represents potential upside of 24% compared to Thursday's closing price.
However, Pivotal Research Group analyst Jeffrey Wlodarczak is much more bullish than his Wall Street colleagues, maintaining an outperform (buy) rating and a Street-high price target of $1,600 (pre-split). That suggests potential gains for investors of an additional 47% compared to Thursday's closing price. The analyst notes that "Netflix remains underpenetrated globally, offers an extremely compelling price-to-entertainment value (that is continually improving), boosted by their ad-supported offering."
What might give investors pause is the stock's lofty valuation. Netflix is currently selling for 47 times earnings, and 35 times next year's expected earnings. While that's certainly a premium valuation, consider this: Netflix has outperformed the broader market by a wide margin over the past 10 years, generating gains of 939% (as of this writing), roughly four times the 229% return of the S&P 500.
When viewed through that lens, I'd argue Netflix is a buy.
