How Netflix (NFLX) is Redefining Its Growth Strategy
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Netflix (NFLX) revolutionized how we consume entertainment, transforming from a DVD-by-mail service to the world’s leading streaming platform. Its growth was so phenomenal that analysts quickly worried whether the streaming giant had hit market saturation in the post-Covid era. However, the company’s latest quarterly earnings demonstrate that Netflix still has a few tricks up its sleeve. Search volume among financial pros and retail soared, as did Netflix’s stock last Friday. But, are the company’s best days behind it or yet to come? Netflix’s Business With over 260 million paid memberships across 190+ countries, Netflix has become a household name, offering a vast library of TV shows, movies, and original content. The company focuses on creating and delivering compelling entertainment to its global audience. Netflix produces a wide range of original content, from big-budget films to niche documentaries, catering to diverse tastes and cultures. Its innovative approach to content creation and distribution has disrupted traditional media models, allowing viewers to binge-watch entire seasons and access content on demand. |
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Netflix segments its business into geographic segments:
In Q3 2024, Netflix reported strong financial results, with revenue growing 7.8% year-over-year to $9.82 billion. Rather than looking for new growth opportunities, management focused on password-sharing crackdowns to convert ‘borrowers’ to paid subscribers. The move helped the company add 8.76 million new members in Q3 bringing its global total to 247.15 million. Yet, the ad-supported lower-cost option the company recently introduced accounted for 30% of new subscriptions in countries where it’s available. Management now expects ad revenues to double in 2024. Netflix is also expanding into live events and sports, including securing the rights to stream WWE’s weekly show “Raw” starting in 2025. Furthermore, Netflix is investing heavily in gaming. The company has been steadily expanding its mobile game offerings and plans to explore cloud gaming to reach users on all devices they use to access Netflix. Financials
Source: Stock Analysis Netflix’s revenue gains slowed in 2022 and 2023 from its breakneck double-digit growth. So, the latest results got investors plenty excited as sales accelerated. Margins also improved to their best levels from gross down to profit margin. Free-cash-flow margin dropped slightly. However, it’s worth remembering that Netflix didn’t start generating positive cash flow from operations until 2020. Today, the company kicks out almost $7.5 billion in cash from operations, allowing it to implement a generous $7.8 billion share buyback in the past year, worth about 2.4%. Total debt increased to $18.5 billion from $17.0 billion the prior year, while cash onhand went from $7.1 billion to $9..2 billion during the same period. Valuation
Source: Seeking Alpha At first glance, Netflix appears expensive, at least relative to Disney (DIS) or Comcast (CMCSA) on a P/E basis. However, Netflix’s price-to-earnings growth (PEG) ratio isn’t that much higher than its peers. But, when we get down to cash flows, Netflix’s price to cash flow is substantially higher than all except for Roku (ROKU) Growth
Source: Seeking Alpha It’s interesting to see Netflix command the premium valuation despite lackluster growth over the past few years, with its three-year average at just 9.5%. Clearly, investors believe the company can not only keep these double-digit sales numbers but also expand its free cash flow along the way. Profitability
Source: Seeking Alpha Netflix’s premium likely comes thanks to its incredible margins. While Comcast boasts a higher gross margin, Netflix beats its peers on EBIT and delivers higher returns on equity, assets, and total capital than any of its peers.
Our Opinion 8/10 We believe Netflix has beaten back market saturation fears. Its growth opportunities should feed the sales pipeline for at least a few more years. The stock supports its higher premium with a solid growth outlook and excellent profitability. While it may not be part of the Mag 7, we view it as a solid investment nonetheless. |
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Proprietary Data Insights Financial Pros’ Top Streaming Stock Searches in the Last Month
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