Followers of Netflix (NASDAQ:NFLX) know that the past year has been a weird one for Netflix stock. Its share price has been all over the map. Even long-time shareholders are probably scratching their heads over 2019.

If you bought Netflix on the last day of 2018, and still hold today, you’re up 27%. It’s not the kind of growth early Netflix investors are used to, but it’s still pretty darn good. 

If you bought at its 52-week low of $252.58, you’re doing even better because it didn’t hit its low until late September. In fact, if you’re still holding, you’re sitting on an annualized gain of 116%. 

However, if you bought last July during its summer resurgence, you’re underwater by a substantial amount. I myself have felt the wrath of Netflix stock over the past year.

Last August, I suggested that its stock was all teed up to make a run at $1,000. At the time, the company was licking its wounds after delivering second-quarter results that showed it had fewer U.S. subscribers than in the first quarter, its first sequential drop in eight years. In addition, it only added 2.83 million international subscribers in the quarter, 2.3 million lower than its own internal estimate. 

Over the next couple of months, as the wall of worry grew, Netflix spiraled down to its 52-week low. 

Then it reported strong earnings — analysts expected 68 cents on $4 billion in revenue, it delivered 89 cents on $4 billion in sales — that included big subscriber additions in both the U.S. and Internationally and all was forgiven.

Now, as it heads into 2020 with a number of new competitors on its tail, it probably seems odd for me to be suggesting $500 is even remotely a possibility over the next 11 months. Once bitten, twice shy, and all that. 

Nonetheless, I do think it’s a possibility. Here’s why.

It All Comes Down to Content

I took the opportunity over the holidays to try out both Apple’s (NASDAQ:AAPL) and Disney’s (NYSE:DIS) streaming products. Both offer a free week. Of the two, if I were to sign up for a monthly membership, I’d probably go for Apple TV+. 

Although I enjoyed Baby Yoda and the Mandolorian, I didn’t see much entertaining content on Disney+ beyond the Star Wars series. As an aside, did anyone else think Mando’s character sounded a lot like Clint Eastwood? But I digress.

As for Apple TV+, I really liked The Morning Show (Billy Crudup in his role as network executive Cory Ellison was fantastic, one of the best TV characters in years) and Jason Momoa’s sci-fi series See looked interesting although I didn’t get the chance to binge-watch it before the free week ran out. 

Perhaps it’s a personal thing, but of the two, I see Apple being a bigger threat to Netflix, but that’s only if Tim Cook opens his checkbook. As it stands now, Apple is like seeing a barren food pantry when you’re starving. It needs a heck of a lot more content to get me to sign up on a permanent basis. 

Which brings me back to Netflix. 

My wife and I just finished watching Messiah, a series about a man thought by some to be the second coming. Critics don’t seem to like it but we sure did. There are a number of shows on Netflix that we just haven’t had the time to watch. It remains the content leader by a country mile. 

I expect that I’ll have the same reaction to Peacock, Comcast’s new streaming service set to launch in July. 

Honestly, unless one of the new services ups its game substantially, I just don’t see them holding a candle to Netflix. Furthermore, even if they are able to deliver more and better content, it’s not as if Reed Hastings is sitting in his office thinking about retirement. 

He’s out there finding and producing great content.

Growing Profits One Subscriber at a Time

In August, I made the argument that Netflix stock was cheaper in 2017, based on its market cap as a multiple of operating profit, than it was in 2012. Let’s flash forward to today to see how it looks in 2020.

In 2012, Netflix’s market cap was 102 times its operating profit. In 2017, that dropped to 99 times its operating profit, and in the trailing 12 months, Netflix’s market cap is just 63 times its operating profit, a 36% reduction of its multiple in just two years. 

Over the past seven years, Netflix has grown its operating profit from $1.81 per subscriber to $14.22 per subscriber (based on a Q4 2019 projection of 165.93 million global subscribers)  through the end of September, a compound annual growth rate of 34%.

Let’s assume that the growth in operating profit per subscriber drops by half over the next seven years. At that pace, Netflix will generate approximately $42.68 in operating profit per subscriber by the end of 2026. Let’s also assume that the 20% YOY growth in subscribers drops to 10% over the next seven years. That would mean it will have 323.35 million subscribers at the end of 2026. 

Pull that all together and we’re talking $13.8 billion in operating profits, six times higher than what it generates today. 

Netflix Stock Can Get to $500

To do so, its stock would have to appreciate almost 50% between now and the end of December. 

If the noise surrounding increased competition were to dissipate, I think it’s possible. Stocks tend to perform reasonably well in election years, so that could work to its advantage. 

Frankly, I see Netflix being cheaper than it’s ever been, save for last August when it traded in the mid-$250s. Long-term, I’m confident it can get to $500, $1,000, and beyond.

We’ll know more next week when it reports fourth-quarter results.  

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.