Netflix has come a long way in the past two decades, evolving from a relatively unknown company with a different business model to a household name with over 238 million subscribers and a market cap of $169 billion. But is Netflix still a worthwhile investment in the current landscape? Let’s take a closer look at the pros and cons.
What’s Going Right for Netflix
- Strong Performance: Netflix’s stock has surged, up almost 30% year-to-date and over 60% in the past 52 weeks.
- Solid Earnings: In July, Netflix reported impressive earnings, including $8.2 billion in revenue (a 3% increase from the previous year) and $3.29 of earnings per share (approximately 15% above analyst estimates).
- Subscriber Growth: The company added 5.9 million customers, indicating continued demand for its services.
- Monetizing Password Sharing: Netflix has started charging a $7.99/month fee for adding additional members outside of a household to an account, tackling password sharing.
- Ad-Supported Tier: The new ad-supported tier, while growing slowly, represents a potential future growth driver for Netflix.
What’s Not Working for Netflix
- High Valuation: Netflix shares now have a price-to-earnings (P/E) multiple of 39, which is considered high, even for a tech stock, and surpasses the one-year average of 36.
- Slower Growth: Netflix’s growth rate has slowed down. Maintaining over 10% growth is challenging, and the company’s growth days may be over. Over the last 12 months, revenue grew at an average rate of 2.8%, significantly lower than the five-year average of 18%.
- Market Saturation: Netflix appears to be reaching a saturation point, facing increased competition from numerous streaming options.
Is Netflix a Buy Now?
For investors, Netflix presents a conundrum. While it boasts a massive subscriber base and significant competitive advantages, its hyper-growth phase appears to have ended. The key question is how much pricing power Netflix has in a market flooded with streaming alternatives.
For growth-oriented investors, it might be worth exploring other options. Value investors, on the other hand, should keep a watchful eye on Netflix’s valuation, as it may become more attractive in the future.
In conclusion, Netflix remains a force to be reckoned with in the streaming industry, but its investment appeal depends on your investment strategy and risk tolerance.