For years, I hesitated to embrace Netflix (NASDAQ: NFLX). However, as 2023 rolled in, a change of heart spurred me to finally consider investing. I needed to replace a long-standing underperforming position in Walt Disney (NYSE: DIS), a move that proved costly with Netflix’s stellar performance overtaking Disney in the recent rally.
In an industry mired in chaos, Netflix stands out as a beacon of success. Here’s why I decided to take the plunge and invest in Netflix, despite its stock doubling in the previous year.
Data by YCharts.
The Winds of Profitability Favor Netflix
For years, my reluctance to own Netflix stock stemmed from its lack of profitability. Despite boasting GAAP net income figures, the absence of profitability on a free cash flow basis kept me at bay. However, the tides turned dramatically in 2023. Netflix matured into a highly profitable entity across all metrics in the past year, surpassing even its GAAP net income figures.
Data by YCharts.
The market duly noted Netflix’s profitable leap, triggering a significant stock surge, particularly since the onset of 2023. Presently, shares command a premium, trading at 50 times trailing 12-month earnings or nearly 40 times trailing 12-month free cash flow. Some may argue that it’s too late to jump on the bandwagon, but is it really?
Future Projections Paint a Rosy Picture
Netflix’s subscriber base continues to soar, bolstering its position in the global media landscape. Unbound by international barriers, Netflix’s hefty investment in diversified content over the years positions it as a frontrunner. With total subscribers rising by 13% in Q4 of 2023 to eclipse 260 million, Netflix still holds only a single-digit percentage of global screen time.
Subscription costs are on the rise, an advertising arm is taking shape, placing Netflix on the trajectory to mirror traditional cable models with a modern twist of personalized viewing. Despite headwinds, the steady influx of subscribers underscores Netflix’s ability to uphold a low-teens revenue growth in the foreseeable future.
Chart source: Netflix.
Management signals an intent to incrementally enhance profit margins. Despite a near-term flattish outlook for 2024 due to content production delays sparked by industry strikes, Netflix remains a juggernaut with ample cash reserves to fund expansion plans. Shareholders have already reaped benefits, with Netflix funneling back $6 billion through stock repurchases last year, underscoring the company’s rewarding stance.
The metamorphosis at Netflix from bear market woes to robust growth and profitability is a testament to its resilience. As the year unfolds, expect to see more shares of Netflix finding their way into my portfolio.
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Nick Rossolillo and his clients now hold positions in Netflix. The Motley Fool also has positions in and endorses Netflix and Walt Disney. The Motley Fool maintains a disclosure policy.
