Streaming video giant Netflix (NASDAQ:NFLX) has long been one of the best performers on Wall Street. Over the past decade, Netflix stock is up a whopping 1,790%, versus a mere 200% gain for the S&P 500.
Some pundits are concerned that, on the heels of such an enormous rally in the 2010s, NFLX stock is due to take a breather during the 2020s.
But that’s not how stocks work. Stocks aren’t driven by optics. They don’t stop going up because they’ve already rallied a bunch. Instead, stocks are driven by fundamentals, and red-hot stocks stop going up once the fundamentals start to deteriorate.
That’s not going to happen anytime soon for Netflix. Instead, the fundamentals underlying NFLX will remain very strong for the next decade.
Specifically, three big drivers pushed Netflix stock to nearly 2,000% gains during the 2010s:
- A enormous shift among consumers from linear TV packages to streaming TV services.
- Netflix’s ability to create the best streaming content in the world, and leverage its unmatched content portfolio to attract millions of subscriber sign-ups every month.
- Strong demand for Netflix content allowing the platform to hike prices, and thereby unlock significant operating leverage.
All three of those growth drivers will remain vigorous during the 2020s. As they do, Netflix’s growth narrative will remain robust, and NFLX stock will keep powering higher, likely to levels above $1,000.
Here’s a deeper look:
The Streaming Video-on-Demand (SVOD) Revolution
The world is pivoting from linear TV to streaming TV, because the former is clunky, expensive and inconvenient, while the latter is flexible, cheap and hyper-convenient.
This pivot has been underway for about a decade now. But it won’t stop until every linear TV household in the world has cut the cord and adopted streaming TV.
We are far from that point today.
My research suggests that there are about 400 million SVOD households in the world today. That represents less than 25% the number of global TV households in the world, which stands at around 1.7 billion homes.
Clearly, there’s still a long, long runway here before streaming TV reaches its final destination of global ubiquity.
I see the number of global SVOD households consistently rising by 10%-plus into 2025, and 5%-plus plus into 2030, ultimately leading to about a billion SVOD households globally by the end of the decade — up more than 2X from the current number.
In other words, the industry Netflix created and dominates today, will continue to grow at a very healthy pace over the next 10 years. That, of course, is great news for Netflix’s stock holders.
Netflix’s Inimitable Advantages in SVOD
Netflix has sustained unrivaled leadership in the SVOD market because the company has — year-in and year-out — created the industry’s best original content, which has both attracted new subscribers and kept old subscribers hooked.
Importantly, despite concerns of rising competition from the likes of Disney+, HBO Max and others, Netflix’s dominance in creating original streaming content is only getting stronger. Nielsen just reported that of the 10 most watched original streaming series of 2020, nine of them were Netflix shows, led by Ozark, Lucifer, The Crown and Tiger King.
How does Netflix do it?
Scale and data.
Two things create good content. A lot of money to attract top-talent, and a lot of knowledge about what your audience wants to watch. Netflix dominates every other SVOD platform on both fronts.
Thanks to a multi-year head-start in the SVOD space, Netflix has amassed a 200-plus million sub base at a time when most everyone else in this space is struggling to scratch 30 million subs. Netflix can thus justify spending a great deal of money on original content, much easier than other platforms, because the potential return is significantly higher.
At the same time, Netflix’s 200-plus million sub base gives the company more dynamic, real-time and contextualized data on the viewing preferences of consumers globally than any other media giant. Thus, Netflix can use its data-driven production method to create more relevant content than anyone else in the world.
These scale and data advantages are inimitable. Nobody will match Netflix on the scale or data fronts anytime soon, if ever. To that extent, Netflix will continue to make the best content in streaming TV for the foreseeable future — which means that the platform will continue to add millions of subscribers every month for the next several years.
Again, this is great news for NFLX.
More Price Hikes Coming Soon … Without Any Churn
The value of good content to Netflix is more than just millions of new subs every month. It also means that Netflix can hike prices.
Netflix has done multiple price hikes over the past several years. They are averaging about one price hike every two years. These price hikes have done absolutely nothing to the subscriber base. Hardly anyone churns. Subscribers just suck it up, and move on, because Netflix content is so good that consumers don’t want to go without it.
This dynamic will remain true for the foreseeable future.
Just look at the data. Nine of the top 10 original streaming TV shows were Netflix shows in 2020. Consumers aren’t going to give up all that awesome content because prices went up $1 per month.
Thus, Netflix will continue to gradually hike prices by ~$1 per month every two years, without any meaningful churn. That’s important, because Netflix hiking prices means hundreds of millions of dollars in incremental revenue, without any incremental costs. Each price hike is exceptionally margin additive.
Broadly, then, the dynamic of robust revenue growth and robust margin expansion which has underpinned the rally in NFLX stock over the past decade, will remain in-place for the next decade, too.
Bottom Line on NFLX Stock
Netflix stock was one of the stock market’s biggest winners in the 2010s because of three strong fundamental drivers. All three fundamental drivers will remain vigorous throughout the 2020s. Thus, red-hot NFLX stock should stay red-hot this decade.
The only concern? Valuation. But, even then, my numbers suggest that Netflix stock — assuming it can run to 500 million subs, hike prices to $15 per month and operate at around 30% operating margins — will be worth $1,000 in the not-too-distant future.
With the fundamentals strong and the valuation reasonable, NFLX stock is in a great position to remain one of Wall Street’s brightest stars.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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