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Floriana Grundy
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Netflix (NFLX 2.13%) completely upended the entertainment industry by introducing streaming video to the masses. Thanks to its tremendous success, the business has been a huge winner for investors. In the past two decades, shares have skyrocketed 15,720%.
This streaming stock is now one of the world's most high-valuation enterprises, with a market cap of $244 billion. But it still has the potential to continue rewarding shareholders in the long run. With that being said, can Netflix become a trillion-dollar company by 2035?
The company's ascent has been nothing short of amazing. By creating a better user experience, one focused on convenience and broad content choices, Netflix has registered unbelievable growth. Revenue in 2023 of $33.7 billion was up 666% from a decade before. The current subscriber base of 270 million has climbed astronomically higher over the years.
But the Netflix of today is a far different animal than the one from the past. The company's service is reaching a more mature stage in its key markets, particularly in the U.S. And the leadership team just announced that it will stop reporting quarterly subscriber numbers starting next year, instead prioritizing revenue growth and engagement.
Investors shouldn't be concerned, though. The business added 9.3 million net new subscribers in the first quarter, while posting a revenue gain of 14.8%. Netflix is finding tremendous success in new areas that it previously didn't focus on. The ad tier reported 65% quarter-over-quarter membership growth, signaling a real interest from people looking for a cheaper option. Netflix also launched a campaign to crack down on password sharing, requiring users to sign up for their own accounts.
Besides these two successful moves, the company is venturing into new content opportunities. Of note is the recent deal signed with TKO Group to bring Raw to Netflix starting next year. There are also reports swirling that Netflix might bid for the rights to stream NBA games. Getting into live sports is something that the executive team said would never happen. We'll see if this actually comes true.
Despite its monumental rise over the past decade, Netflix is still staring at a sizable expansion opportunity. Management estimates that there are about 500 million smart-TV households worldwide (this figure doesn't include China, where Netflix isn't available). This gives the company plenty of room to slowly grow its user base and revenue potential.
From a financial perspective, Netflix has never been more lucrative. Critics always called out how much money the company was spending on content, believing that Netflix would never start producing cash. That was the wrong view.
After generating $6.9 billion of free cash flow in 2023, management expects to produce $6 billion this year. This is the money left over after Netflix invests in content. Netflix has now implemented a share buyback policy, returning excess cash to shareholders.
As of this writing, Netflix sports a market cap of $244 billion. For the company's valuation to rise approximately four-fold over the next 11 years, it implies an annualized increase of about 13%. That's not a wildly bullish outcome.
Even so, I think joining the exclusive $1 trillion club is within the realm of possibility. Netflix trades at a price-to-sales ratio of 7.2, which is in line with its trailing 10-year average. If this multiple remains the same, which is anyone's guess, the business needs to grow revenue by about 13% per year between now and 2035. If it can, the company's market cap can get to $1 trillion.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool recommends TKO Group Holdings. The Motley Fool has a disclosure policy.
Last quarter, the streaming giant missed earnings-per-share (EPS) estimates but exceeded revenue forecasts and the stock rallied on positive guidance. This time, the streaming giant is expected to report EPS of $4.54 on $9.28 billion in revenue.
Starting in January 2025, Netflix will be the exclusive home to WWE's Raw, the consistently popular wrestling organization in the United States, Canada, the United Kingdom and Latin America. It appears the streaming giant is making a push towards live sports content, which could draw in a much larger audience relative to those who just binge their favorite shows.
Looking at the options chain, we can gather information around expected stock price moves through different expiration cycles with implied volatility. This week, the expected stock price move is +-$51.63. This makes up about 8% of the current stock price, which is a pretty high expected move compared to other popular equities. Looking further, we can see that the January 2025 expected stock price move is +-$149.25. This earnings call accounts for a third of the expected move through January of next year, so the market is expecting fireworks this time around.
Traders and investors that are bullish on Netflix for this earnings call are likely expecting a strong guidance for the rest of the year, with more information around the future of live sports and expansion efforts.
Netflix's ad-supported membership tier should begin to show some real revenue strength as the user base continues to grow over time, attracting big advertising dollars. With such a huge increase in EPS expectations, it seems the market is expecting plenty of strength from this earnings call.
Netflix may not exceed strong expectations. And if that's the case it may scare off investors in the volatile market we're seeing today. The competitive landscape is getting stronger as well, with huge companies like Apple (AAPL) and Amazon (AMZN) making large investments into their own streaming platforms.
Mike Butler, tastylive director of market intelligence, has been in the markets and trading for a decade. He appears on Options Trading Concepts Live, airing Monday-Friday. @tradermikeyb
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Whether a company should pay a dividend depends on many factors. Thousands of publicly-traded companies pay dividends to shareholders, and some have maintained long histories of raising their dividends yearly.
With more than 240 million members spread out over nearly 200 countries, Netflix is a media giant. While Netflix does offer a wide variety of second-run television programming and movies, the company also produces its own original content.
In the 2023 third quarter, global streaming paid memberships increased 10% to just over 247 million while global streaming paid net additions totaled 8.76 million. The company expects to add a similar number of users in the fourth quarter.
Given its strong earnings growth, investors might think that the company would consider paying a dividend to shareholders, but Netflix has not paid a dividend to date. Part of this explanation is that the company is still not consistently profitable as it could be.
In other words, if Netflix were to distribute virtually all of its annual earnings-per-share as a dividend, it would generate a 2.6% dividend yield. Of course, it would not do this because it would deprive the company of cash to invest in growth and debt repayment. Content costs are high, which is a big reason why Netflix does not pay dividends.
Many companies pay dividends as they are an important part of their capital allocation programs. Some companies, such as Dividend Aristocrats like Coca-Cola (KO) and Johnson & Johnson (JNJ), have increased their dividends for several consecutive decades.
Even companies that have been historically reluctant to pay dividends have begun to do so in recent years. This is particularly true among technology companies, which used to spend heavily to grow their businesses but now have started to use dividends as a way to return capital to shareholders.
Companies like Apple (AAPL) and Cisco Systems (CSCO) have initiated dividends in the last decade because their shareholder bases demanded a dividend, and their business models generated consistent free cash flow.
It is very understandable why these investors would want companies to pay dividends. As stock prices fall in a market downturn, dividends provide a cushion against paper losses. They also allow investors who reinvest dividends to purchase more shares at lower prices, thus increasing their overall dividend income. When markets rise again, dividends only add to shareholder returns.
However, growth companies like Netflix differ from time-tested dividend stocks like Coca-Cola and Johnson & Johnson because they still need to spend vast amounts of capital on content to grow. This is a necessary expense if Netflix plans to not just maintain but grow its subscriber base in the future.
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