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Silvina Spindler
Netflix (NASDAQ: NFLX) has minted a lot of millionaires since its public debut in 2002. A $10,000 investment in its initial public offering (IPO) would be worth a whopping $5.4 million today. But it wasn't a smooth ride. Netflix's stock endured some steep declines over the past two decades as it repeatedly transformed its business model, yet it has consistently proved the bears wrong.
Some investors might argue that Netflix is running of room to grow. After all, it already owns the world's top premium streaming video platform with 269.6 million paid subscribers and has a market capitalization of $260 billion. But could this streaming video giant still generate more millionaire-making gains from a fresh $10,000 investment today?
Back in April 2022, Netflix's stock sank to its lowest levels in more than four years. That decline was triggered by its first sequential loss of subscribers in over a decade in the first quarter of 2022.
It attributed some of that decline to the Russo-Ukrainian war and users sharing their passwords, but management also admitted that the company faced stiff competition and said it would roll out a cheaper ad-supported tier to gain new users. Those strategies suggested Netflix was running out of room to grow, and that it still needed to ramp up its spending on fresh content to lock in more viewers. It suffered another sequential loss of subscribers in the second quarter of 2022.
However, Netflix gained subscribers sequentially in the third quarter of 2022, and its year-over-year growth in subscribers accelerated over the past year. It also started generating double-digit revenue growth again over the past two quarters.
Netflix attributed its accelerating growth to the expansion of its new paid-sharing plans, price hikes for its existing subscribers, currency exchange tailwinds, and robust viewership numbers for hit shows like Griselda, 3 Body Problem, and Avatar: The Last Airbender. Its number of ad-supported memberships also grew nearly 70% sequentially in the third and fourth quarters of 2023, then rose another 65% sequentially in the first quarter of 2024.
For 2024, Netflix expects its revenue to rise between 13% and 15% and for its operating margin to expand from 21% to 25%. Those expanding margins reinforce its reputation as the only major streaming platform that can generate consistent profits. Walt Disney, which served nearly 150 million paid Disney+ subscribers in its last quarter, believes its direct-to-consumer (DTC) streaming unit can finally turn profitable by the fourth quarter of fiscal 2024 (which ends this September).
Netflix is still expanding, but it recently surprised investors by saying it would stop disclosing its paid subscriber and average revenue per member (ARM) metrics in 2025. It insists those changes reflect the expansion of its pricing tiers and the introduction of new revenue streams like advertising and paid sharing plans. However, the elimination of those key metrics could make it much harder to gauge Netflix's growth while masking the lumpier expansion of its global audience.
For now, analysts expect Netflix's revenue to expand at a compound annual growth rate (CAGR) of 12% as its earnings per share (EPS) increases at a CAGR of 28%. But at $580, Netflix's stock doesn't look particularly cheap at 34 times this year's earnings. That's because it's still being valued as a higher-growth tech stock, rather than a slower-growth media stock.
Let's assume Netflix hits those targets and grows its EPS at a respectable CAGR of 20% through 2034. If that happens and Netflix still trades at about 30 times earnings, its stock might be trading at around $3,300 per share in 10 years.
That would represent a near-sixfold gain from its current price -- but it would fall woefully short of turning a $10,000 investment into $1 million. Netflix is still a solid play on the secular growth of the streaming media market, but investors shouldn't expect it to replicate its millionaire-making gains from the past two decades.
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Games may feel like a stretch, but recall that in January 2007, Netflix launched three hundred mediocre streaming titles to complement its DVD by mail service. Today, the company is an original content powerhouse and is one of the biggest studios in the world. These step-function innovations take time.
Below is a sample roadmap. I completed this exercise to illustrate how to transform the SMT framework into a rolling, four-quarter roadmap to tell a story of how each strategy might play out over time:
Netflix released its Q1 2022 earnings detailing a loss of 200,000 customers against a forecast of 2.2M new subscribers. It was the first quarter in ten years with no growth. Worse, Netflix forecasted a 2 million subscriber loss in Q2.
Performance in India is below par. Netflix lowered prices in India and is still working to understand how to compete there. Compared to the US, where households pay $100/month for cable TV, cable TV costs $3/month in India. The value equation for streaming services in India is very different from the US.
In 2005 Netflix struggled to deliver profits with its DVD by mail service and launched an advertising business to try to generate profits. They displayed ad banners on the site and printed ads on their DVD envelopes. They even executed an A/B test to see if there was a negative impact. The surprise: no retention impact. And for three years, advertising delivered meaningful profits.
Like advertising, Netflix believes that it will take a year to figure out the best approach. Netflix also acknowledged that account sharing exists because of their customer-friendly policy; they made it easy for members to set up multiple profiles and watch many movies simultaneously. It will take a while to reset expectations for account sharing among Netflix members.
Each month, I answer a few questions, drawing from my experience as VP of Product at The Learning Company, Mattel, Netflix, and Chegg. My free \u201CAsk Gib\u201D product newsletter now has 30,000 subscribers. A few quick notes:
You can purchase my self-paced Product Strategy course on Teachable for $200 off the regular $699 price. The course takes you through the same product strategy frameworks that I outline in this essay. The first two modules are free, so you can \u201Ctry before you buy.\u201D There\u2019s no expiration date for the materials, you\u2019ll receive an invoice you can expense with your employer, and there\u2019s a certificate of completion.
Two weeks ago, Netflix reported its first subscriber loss in ten years. They forecasted two million new subscribers in Q1 but lost 200,000 members and then predicted a loss of two million members in Q2. Wall Street responded quickly, driving Netflix\u2019s stock price from $350 to $200 per share. What should Netflix do?
Like product strategies, each of these steps is a hypothesis. Today, Netflix focuses on original content, and its next big bet is games. The vision is that games will be a significant part of Netflix\u2019s subscription service in five to ten years.
Over the last five years, in anticipation of Disney+\u2019s launch, Netflix focused on growth, enabling the company to build a hard-to-copy advantage through economies of scale. This year, Netflix can amortize its content investment across 222 million members allowing it to invest $18B in content \u2014 twice as much as Disney+. As a second priority, Netflix focuses on monetization so it can invest incremental profits in even more original content. The third priority is engagement, as measured by retention, given that the product\u2019s 2% monthly churn is so low.
A good product strategy answers the question, \u201CHow will your product delight customers in hard to copy, margin-enhancing ways?\u201D Below are five high-level hypotheses \u2014 product strategies \u2014 outlining how Netflix plans to continue doing this. While their high-level engagement metric is retention, I listed a proxy metric for each product strategy to assess short-term progress. I\u2019ve also added sample tactics against each strategy.
My work below is highly speculative and is not comprehensive. It attempts to craft a story using several product strategy models and observations from Netflix\u2019s blog, earnings statements, and the product itself.
Personalization delights members by making it easy to find movies they\u2019ll love. Executing personalization at scale is very hard to copy. Personalization also helps Netflix to generate profits. They have taste data for 222 million members and use it to \u201Cright-size\u201D their content investment. Netflix spends more on potential blockbusters like \u201CStranger Things\u201D and less on niche content like \u201CDawn Wall\u201D based on forecasts derived from their personalization algorithms.
Viewing experience. Netflix encodes titles hundreds of times for different devices and bandwidths. They also partner with over a thousand Internet Service Providers to localize traffic with their Open Connect Appliance embedded deployments, enabling movies to be viewed in high resolution nearly instantly. Open Connect also creates a hard-to-copy network effect via this ISP network. High-quality video and audio that \u201Cjust works\u201D delight customers.
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