Netflix’s strong fundamentals have helped the stock soar in the past several years.
The company dominates the streaming industry with over 300 million subscribers.
There’s a good chance that Netflix’s lofty P/E ratio will come down by 2030.
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Netflix (NASDAQ: NFLX) has fast-forwarded investor returns. In the past five years, the global media pioneer’s share price has soared 150% as of this writing. Ongoing subscriber, revenue, and operating profit growth have been the key ingredients for this perennial winner.
But where will this top streaming stock be in five years?
Netflix continues to fire on all cylinders. During the second quarter (ended June 30), the company reported 15.9% year-over-year revenue growth. Even better, free cash flow jumped 86.9%. Netflix is an extremely profitable enterprise these days, something many bears believed would never happen due to the company’s massive content budget.
The business dominates the streaming landscape. According to Nielsen data, 8.8% of all U.S. TV viewing time in July happened on Netflix. The only other streaming platform with a greater share is YouTube, which isn’t a an apples-to-apples comparison due to its user-generated content.
There’s no reason to believe that Netflix’s fundamentals will weaken anytime soon. In 2030, revenue and earnings should be higher than they are today. That supports a rising stock price.
Netflix shares should be higher five years from now, but more importantly, will the stock be able to beat the market between now and 2030? That’s a different story.
Valuation is the main concern I have. Shares trade at a price-to-earnings (P/E) ratio of 51.7. The bulls will argue that Netflix’s monster success warrants the premium valuation. However, the company’s growth going forward isn’t going to resemble the past. There’s a good chance the P/E multiple will contract over the next five years as the business continues to mature, offsetting some of the stock’s gains in that time.
Netflix has been a market-beating stock in the past, but looking ahead to 2030, it wouldn’t surprise me if the stock lags the S&P 500.
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