Is Netflix Stock a Buy Today?
With a stock price that has quintupled approximately over the past five years, Netflix (NASDAQ: NFLX) has been a big winner for investors. Direct consequence of the boom streaming market, the company has had a long history of revenue growth, supported by the addition of more subscribers over time.
What matters to potential investors now is what the future holds. Let’s see if Netflix, with sound market capitalization of $ 270 billion, is a worthwhile investment today.
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Key competitive advantages
A great company is one with a competitive advantage, a positive characteristic that sets it apart from its peers. In the case of Netflix, that advantage is found in its massive size, thanks to being the number one player in the streaming industry.
The management team, led by co-founder and co-CEO Reed Hastings, knew early on that the internet was going to dramatically change the way people consume video entertainment. Therefore, they have invested heavily (helped by borrowed funds) to develop and acquire content in order to attract more users. It turned out to be a strategic move of genius, as Netflix now has nearly 214 million members worldwide.
The impressive scale also shows up in Netflix’s finances. The company’s operating margin has gone from mid-single digits five years ago to over 20% today. And what was once a money-intensive business is now on the verge of being a cash cow.
Netflix will spend $ 17 billion in cash on content in 2021, a budget possible only because of its massive size and huge number of subscribers. Plus, being in the streaming industry for so long (and with so many customers) means that Netflix has a huge amount of proprietary data on viewing habits, fueling its ability to invest in. better quality content. No one else has access to a comparable treasure trove of visualization data.
Of the 4.4 million subscribers added by Netflix in the last quarter, 4.3 million were from outside the United States and Canada. For followers of the action, this should come as no surprise. As the more mature domestic market becomes saturated, Netflix will need to rely on international customers to drive growth in the years to come.
So far, the company has been extremely successful in recruiting members from overseas. Netflix is taking a big step in India, for example, investing hundreds of millions of dollars to produce local shows and movies in the second most populous country on the planet. India is the fastest growing streaming market today, according to accounting giant PwC. Add to that the fact that the country is expected to have 900 million active internet users by 2025, and it is obvious that Netflix has a big opportunity ahead.
And the monster success of series like the Spanish crime drama Money theft and the South Korean thriller Squid game, which have both been developed in their respective local languages, demonstrates Netflix’s ability to create successful series loved by viewers globally.
An attractive valuation and financial situation
At market close on December 8, Netflix was trading at a price / benefit Multiple (P / E) ratio of 57. This may at first seem like a high price to pay, but consider this to be the lowest P / E ratio for which the Netflix stock has sold in most. nine years old. The stock has performed incredibly well, but the company’s earnings have grown even faster, making the valuation very attractive.
As I noted above, Netflix is taking a financial turn, with consistently positive results free movement of capital (FCF) on the way.
“We plan to be positive at FCF on an annual basis in 2022 and beyond,” management stressed in the latest letter to shareholders for the third quarter. Investors have been waiting for this development for a long time.
The management team are so confident in Netflix’s current financial position that they implemented a $ 5 billion share buyback program earlier this year. What’s even more wonderful is that Netflix no longer needs access to the capital markets to run its day-to-day operations.
These positive developments, combined with an intriguing valuation, key competitive advantages, and strong international growth, make Netflix stock a solid buy right now.
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Neil Patel owns shares in Netflix. The Motley Fool owns and recommends Netflix. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.