All you Netflix (NASDAQ:NFLX) shareholders can breathe a little easier now that Netflix stock appears to be on its way back to $400.
At least that’s the opinion of Fortune contributor Kevin Kelleher.
“Netflix’s stock is having something of a late-summer resurgence, erasing some of the losses it suffered after it reported a slowdown in subscriber growth during the second quarter,” Kelleher wrote.
For those of you who were confident enough in Netflix’s bigger picture to have bought Netflix stock after its mid-July to mid-August collapse — a 24% drop over the span of a month — you are to be commended because that head fake by Netflix might have been on par with some of the NFLs best receivers.
I think Kelleher’s right on the money about the company’s prospects.
The 1.12 million subscriber miss in the second quarter was what manufacturers might refer to as order delays. Those subscribers will ultimately show up, but the content wasn’t there in Q2 to bring them through the door.
One quarter’s loss is another quarter’s gain whether the surprise comes in the third or fourth quarters.
What’s Really Important?
I’ve been on the Netflix bandwagon for some time. I first recommended investors buy Netflix stock in November 2016 thinking that the video streaming company might be acquired by Walt Disney (NYSE:DIS).
In hindsight, we know that isn’t happening. Since then I’ve grown to like Netflix as an independent company able to take on the big dogs.
Most recently I recommended its stock in late July suggesting that CEO Reed Hastings’ overly ambitious quarterly forecast was nothing more than an aberration having little bearing on the big picture five years from now.
What’s important, I believe, is a double-digit sequential rise in quarterly operating profits per subscriber. If that keeps moving higher at a decent clip, I don’t see why Netflix stock can’t hit $1,000 by this time five years from now.
Earlier this summer, InvestorPlace’s Thomas Scarlett wondered if Netflix could hit $500.
Short answer: Scarlett believes the company’s moves to make viewing Netflix outside the home more accessible for subscribers which will make its recurring revenue that much stickier.
He’s a yes. The fact that I think it can hit $1,000 within the next five years means I’m a yes also.
Why I See $1,000
As I said previously, it all comes down to operating profit per subscriber and how much investors are willing to pay for those subscribers.
Back in 2012, Netflix had 27.6 million paid subscribers, an operating profit of $50.0 million or $1.81 per subscriber and a market cap of $5.1 billion — a multiple of 102 times its operating profit.
Fast forward to 2017, Netflix had 110.6 million paid subscribers, an operating profit of $838.7 million or $7.58 per subscriber and a market cap of $83.1 billion, a multiple of 99 times operating profit.
So, despite the fact the company’s operating profit has grown by a factor of 17 over the past five years, investors are getting NFLX stock for less today than investors were willing to pay five years ago.
That makes sense at first glance given its growth trajectory was greater back then, but if you factor in the fact its profitability in 2012 was still very much in doubt, the price you pay today seems reasonable considering the risk is far less.
The Bottom Line on Netflix Stock
Every stock no matter how good always has a test or two along the way. Netflix got a taste of that in late July.
Will it get another test before it rides off to $1,000?You can count on it.
How much is too much to pay for Netflix stock? Definitely not $360.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
