In a year filled with market twists and turns, Netflix (NFLX) stock has found its way back into the limelight. It’s no comeback story; it’s an ongoing success. Despite a substantial rally in 2023, this streaming giant is demonstrating that it’s far from reaching its peak.
Netflix’s recent stellar Q3 earnings announcement sent its shares soaring. This news underscores the remarkable momentum in its membership base, painting a promising picture for the future. So, if you’re wondering whether it’s too late to join the Netflix investment party, the answer is a resounding “no.”
A Long Growth Runway: Concerns have swirled around Netflix’s potential for continued growth, with worries about increased competition, market saturation, and slowing consumer spending. However, the latest earnings report dispels these concerns. Netflix added a staggering 9 million paying subscribers in Q3, pushing its membership base close to 250 million, compared to 223 million a year ago.
This surge is a clear indicator that Netflix’s expansion story is just beginning, with plenty of room for growth. Additionally, the company’s 7.8% share of total television watching in the U.S. market in September, closely following YouTube, is a promising sign. Management is focused on improving the quality of their content, which suggests that this upward trajectory is likely to continue.
Financial Strength: Netflix’s stock rally is also powered by an improved profit and cash flow outlook. The operating profit margin is on track to reach 20% of sales in 2023, at the top end of management’s forecast range (between 18% and 20%). Free cash flow is projected to reach nearly $7 billion, up from an earlier estimate of around $5 billion.
Part of this improvement is attributed to the strikes that have impacted Hollywood in 2023, slowing down content production and temporarily reducing content-related spending. However, Netflix anticipates further gains in cash flow and profit margin. Operating income is expected to climb to approximately 23% of next year’s sales, driven by a growing membership base, rising advertising income, and localized price increases. With sales growth and these margin improvements, Netflix is poised for impressive returns.
The Price is Right: While Netflix stock might cost more today, it’s not outrageously overpriced. It’s trading at 43 times earnings, which is lower than recent P/E ratios that reached around 48. The price-to-sales ratio is less than 6, below the highs seen earlier in 2023.
For long-term growth-focused investors, these valuation ratios shouldn’t be a major concern. A modest premium now may not significantly impact your long-term returns, especially if you hold onto the stock as Netflix moves closer to 300 million subscribers and over $10 billion in annual free cash flow. Of course, there are potential risks, such as a recession, which could delay major price increases and impact consumer spending.
In conclusion, it’s not too late to consider Netflix as a long-term investment. Taking a measured approach by gradually building a position and closely monitoring the growth story over the next several years might be the smartest strategy.