From DVD rental service to global streaming giant, Netflix (NFLX 0.07%) has arguably been the biggest success story in the media industry over the past two decades, and the stock has generated life-changing returns for those who have held the stock along the way.
The journey continues, though. Netflix is attempting to dominate a competitive streaming landscape, having announced some blockbuster moves over the past few weeks.
All of the drama and commotion have weighed on the stock. Shares are nearly 30% off their all-time high. Make no mistake, long-term investors should thank the market for offering such a proven winner at a discount, its steepest decline since early 2024.
Here is what makes Netflix one of the best tech stocks to own for the next 10 years.
Image source: Netflix.
Netflix's content could soon go to the next level
Netflix has steadily built a portfolio of strong intellectual property over the years, including Stranger Things, Wednesday, Bridgerton, and KPop Demon Hunters, among other notable shows and movies.
Additionally, Netflix continues to branch out into new types of media. It has steadily introduced mobile games, live sports, and events to its platform, and Netflix just announced a new deal to bring video podcasts from Barstool Sports, a popular sports and entertainment brand, exclusively to Netflix starting next year.
However, developing all that content takes time and a significant amount of money.
The company is attempting a major power play, announcing a $82.7 billion deal to acquire the Warner Bros. film and television studios, HBO, and the HBO Max streaming service from Warner Bros. Discovery. Game of Thrones, The Sopranos, the DC Universe, and the Harry Potter franchise are among the top-tier content that Netflix would absorb.
After Warner Bros. Discovery rejected a hostile bid from Paramount Skydance, the merger now faces potential regulatory scrutiny as its primary obstacle to close. If the acquisition ultimately goes through, Netflix's content portfolio would vault to the top of the streaming industry.
An exciting blockbuster deal that comes at a steep cost
With over 300 million paid subscribers, Netflix has grown large enough to become a cash-flow machine. It currently generates more than $0.20 of free cash flow from every revenue dollar. Part of the reason why Netflix's stock has dipped is the concern for the company's balance sheet, should the Warner Bros. Discovery acquisition close.
Netflix would fund the deal primarily with debt. Estimates peg the new debt at about $50 billion, plus an additional $11 billion assumed from Warner Bros. Discovery in the agreement. A post-acquisition debt load totaling $77 billion would leverage Netflix to around 3 times its trailing-12-month EBITDA.
NASDAQ: NFLX
Key Data Points
That's not catastrophic, but it definitely ties up Netflix's financial flexibility for a while. Management would have to focus a significant portion of the company's cash flow on paying that down, and the interest expenses would eat into profits.
Netflix has generated $9 billion in free cash flow over the past year. Assuming cash flow increases from its newly acquired assets, Netflix would still need at least a few years to put a good dent in that debt.
An eventual return to cash cow glory
The fun would come later in the latter half of the next decade, when Netflix finishes paying down its debt and emerges as a cash cow -- a business gushing more cash than it knows what to do with.
Excluding the potential acquisition, analysts see annualized earnings growth of 24% over the long term for Netflix, meaning its bottom line doubles every three years. The company is a global streaming giant, so there is still considerable room to expand its 300 million subscriber base.
Both broadband internet connections and reliable digital payment options are becoming more available around the world, fulfilling the prerequisites for a successful media-streaming business.
Netflix has also found clever ways to further monetize its business, like ad-supported membership tiers, password-sharing enforcement, and its ventures into new media frontiers, such as live sports and video podcasts.
The stock currently trades at 37 times its full-year earnings estimates. That's not cheap, but with Netflix's growth outlook and potential sky-high ceiling if this merger closes, it's hard not to like the tech stock over a 10-year holding period.
