The S&P 500 (^GSPC 1.18%) is the most highly regarded stock market index in the U.S., comprised of the 500 largest publicly traded companies in the country. Many investors consider it to be the most reliable gauge of overall stock market performance, thanks to the breadth of its member companies.
To be a member of the S&P 500, a company must meet the following criteria:
- 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
- Must be profitable on a generally accepted accounting principles (GAAP) basis in the most recent quarter
- In aggregate, must be profitable over the preceding four quarters
Netflix (NFLX 0.18%) first earned its spot in the S&P 500 in December 2010, but recently completed a 10-for-1 forward stock split. This step is usually taken after a company has achieved years of strong business and financial results, fueling an equally strong run in its stock price -- and Netflix makes the grade. Since its 2002 IPO, the stock has surged a massive 80,730% (as of this writing), and Netflix continues to lead the streaming industry it pioneered.
Despite its impressive run, Wall Street believes the company still has a long runway ahead -- with or without its recently announced plans to acquire Warner Bros. Discovery (WBD 0.50%).
Image source: Netflix.
The hits just keep coming
Netflix's history of providing in-home entertainment goes back more than two decades. The company launched its "Watch Now" streaming service in 2007 as a value-added service for its subscribers, but always planned to be an internet-based movie delivery service -- hence the name. Netflix gradually expanded its streaming service in select countries before going global in 2016.
While the move to pivot away from its highly successful DVD-by-mail business was a risky one, it was prescient. Broadcast and cable television viewing, as well as movie theater attendance, are in secular decline, as streaming services are now available in the far reaches of the world.
In the third quarter, Netflix generated revenue that climbed 17% year over year to $11.5 billion, driving its adjusted earnings per share (EPS) up 27% to $6.87. Management expects its growth streak to continue. Netflix is guiding for fourth-quarter revenue of $11.96 billion, resulting in EPS of $5.45, an increase of 28%.
The Warner Bros. Discovery wildcard
Even though Netflix's stock split was completed in November, recent events make it seem like old news. Late last week, Netflix announced plans to acquire certain assets from Warner Bros. Discovery in a deal valued at $82.7 billion, or $27.75 per share. The agreement included the Warner Bros. film and television studios and its HBO and HBO Max streaming services. The deal was unanimously approved by the boards of directors of both Netflix and Warner Bros. Discovery, though it will still require regulatory approval.
On the heels of that deal, Paramount Skydance announced a hostile takeover bid for Warner Bros. Discovery, taking its $30-per-share offer directly to shareholders. It remains to be seen whether the bid will ultimately be successful.
At an investor conference on Monday, Netflix's co-CEO Ted Sarandos seemed unconcerned, saying, "Today's move [by Paramount] was entirely expected. We have a deal done, and we are incredibly happy with the deal. We think it's great for our shareholders. It's great for consumers."
NASDAQ: NFLX
Key Data Points
Assuming the deal goes through, Netflix already has a plan to maximize the benefits of the acquisition. Co-CEO Greg Peters said the company will use licensing to extract more value from Warner Bros. titles and create bundling opportunities for Netflix with HBO and HBO Max.
Netflix has a treasure trove of data spanning decades, which it used to value Warner Bros.' assets. The company has a sophisticated recommendation algorithm that provides Netflix with incredibly detailed information about what viewers like. That, combined with Warner Bros.' vast library of content, represents a winning combination that Netflix will use to extract value from the acquisition and fuel the next stage of its growth.
Several analysts have expressed concerns regarding the price of the deal and integration risk, given the diverse company cultures. While it's certainly understandable, the majority of Wall Street analysts remain bullish on Netflix. Of the 42 who offered an opinion in December, 28 -- or 67% -- rate the company a buy or strong buy, 13 rate it a hold (several based on the pending acquisition), and one has an underperform rating. Furthermore, the average price target of $129 represents potential upside of 34% compared to Tuesday's closing price.
Netflix is currently selling for a premium at 39 times earnings, but that's cheaper than the stock's average multiple of 45 over the past three years, making its valuation more attractive by comparison. Given the company's long track record of execution and its leadership in the streaming industry, I'd argue the premium is justified. Furthermore, Netflix stock has outperformed the broader market by a wide margin over the past 10 years, generating gains of 687%, far outpacing the 233% return of the S&P 500.
By that measure, Netflix stock is still a buy.
