Summary

• Netflix's innovative approach and original content have positioned it to outperform competitors and dominate the streaming industry.

• The company's significant investment in exclusive content has created a loyal subscriber base and strong brand recognition.

• Netflix's global expansion strategy has allowed it to capture diverse markets and increase its revenue streams.

• Despite rising competition, Netflix's first-mover advantage and continuous innovation justify a strong investment rating.

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Many years back, I had speculated that Netflix, Inc. (NASDAQ:NFLX) would eventually reach escape velocity and blow past competitors. This was a relatively bold bet at the time, as many were convinced that entertainment giants like The Walt Disney Company (DIS) would inevitably overtake Netflix. While the article timing was terrible, as Netflix promptly experienced one of the sharpest downturns in its history, it seems like this thesis is finally playing out.

Now, Netflix truly does appear to be reaching escape velocity as its current valuation of $432 billion compared to struggling entertainment giants like Disney. In fact, it is pretty much safe to say that Netflix won the brutal years-long streaming wars since players like Warner Bros. Discovery, Inc. (WBD) and even Disney are now barely on Netflix's radar. To make matters worse for competitors, Netflix still appears to be in a growth phase despite the fact that the company is larger than ever.

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While the timing of my original 2022 thesis was terrible, as Netflix plummeted almost immediately after I wrote the article, the thesis has since been proven to be more or less correct.

Netflix’s Momentum

Netflix boasts a stunning ~302 million subscribers worldwide after adding a record 19 million subscribers in its most recent quarter. Management indicated that momentum is not merely about subscriber additions, but also sustained engagement, which goes right to the core of Netflix’s business model. Given the fact that Netflix was actually losing subscribers just a few years ago, this turnaround is all the more impressive.

People are actively watching and discovering series, films, sports events, and even games on the Netflix platform, and persistent consumption drives top-line growth. The company’s Q4 revenue grew 16% YoY to $10.25 billion, reflecting the potent combination of more subscribers and higher monetization of its user base.

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Financial Strength and Pricing Power

Netflix’s Q4 financials show that the company is capable of scaling and maintaining profitability at the same time. Management reported a net cash generated by operating activities and free cash flow of $1.5 billion and $1.4 billion respectively. Although these figures came in slightly lower compared to the same period one year ago, Netflix’s revenue still grew by 16% to surpass $10 billion for the quarter. Netflix is clearly capable of reinvesting large amounts of its cash flow into content creation and innovation while keeping the platform thriving.

More importantly, Netflix’s ability to raise prices without experiencing a mass subscriber exodus is a sign of its pricing power. In the U.S., the monthly cost for the ad-supported plan recently climbed from $6.99 to $7.99. Meanwhile, the standard and premium plans increased to $17.99 and $24.99 respectively. Despite these price hikes, Netflix has continued to see favorable user metrics. The fact that management can consistently command higher prices helps widen Netflix’s operating margin. In fact, Netflix’s operating margin grew year over year in the latest quarter to 22.2%, up over five percentage points. Netflix's ability to raise prices with minimal subscriber loss is largely a result of its consistent exclusive hits and renewed fan favorites like Squid Game and Wednesday.

Netflix has a strong flywheel effect in play, in which it can use its massive cash flow to reinvest into original content and popular sequels, thereby attracting even more subscribers to feed into this flywheel. (Netflix)

Competitive Advantages in Content

Netflix’s library spans every genre from blockbuster international hits to original documentaries, while it now even hosts live sporting events. A large portion of the company’s success stems from its willingness to invest aggressively in local-language productions. On top of this, Netflix is willing to bet on risky creative ideas that traditional studios might overlook. The streaming service delivered one global phenomenon after another, from iconic shows like Stranger Things to pop culture sensations like the Jake Paul vs. Mike Tyson match, which pulled in record-setting live viewership.

This strong push into live events, including certain NFL games, has captured new demographics and multiplied total engagement hours. Management sees such content as a potent method to draw subscribers in and then retain them with the rest of the platform’s offerings. Many viewers find Netflix more appealing than conventional linear TV as a result of its flexible offerings and subscription plans.

Shift to Advertising and Broader Revenue Streams

Part of Netflix’s bullish argument lies in its nascent advertising business, which management projects will more than double in 2025. By rolling out an ad-supported subscription tier, Netflix has proven it can capture a consumer segment that wants a lower price point. At the same time, this opens up a second revenue stream from advertisers eager to place content in front of the streamer’s global audience.

This ad-supported plan already accounted for roughly 55% of new sign-ups in key markets last quarter. Viewing hours of ad-supported subscriptions remain surprisingly close to those of the more expensive ad-free subscriptions. The advertising sector represents a multi-billion-dollar possibility for Netflix, which is why the company is spending time and resources refining its ad technology.

Netflix's flexible subscription plans appeal to a broad audience (Netflix)

Valuation and Growth Outlook

Netflix trades at a higher multiple than many of its peers, with a forward P/E of around 40. Some skeptics label that multiple expensive, especially if measured against more traditional media or tech conglomerates. However, Netflix’s growth potential still sets it apart. The company posted 16% YoY revenue growth for the quarter and management expects revenue between $43.5 billion and $44.5 billion in 2025. In the likely scenario Netflix can maintain a double-digit growth rate and continue expanding its margins, the valuation premium would be justified.

Large Risks Remain

Even with Netflix’s growing strengths, competition remains fierce. Big tech streaming rivals like Amazon.com, Inc. (AMZN) and Apple Inc. (AAPL) can afford massive content budgets to lure viewers away. In fact, Amazon's Prime Video and Apple's Apple TV+ have been throwing billions of dollars into content, oftentimes at a loss, in order to gain market share. This is simply something that streaming or entertainment pure plays like Netflix or Disney cannot afford to do.

Another risk is the increasingly high cost of talent. Hollywood talent has been pressing for higher compensation to the financial detriment of Netflix. Such strikes will likely grow in frequency as AI becomes an ever-greater threat to their livelihoods. While Netflix has more free cash flow to deploy than many of its rivals, any surge in production costs might temporarily crimp profitability. Finally, Netflix has less room for error given its relatively high multiples. If quarterly results fail to meet the market’s heightened expectations, the stock could experience a sharp downturn.

Conclusion

Netflix's ability to drive organic subscriber growth while incrementally hiking prices shows how heavily entrenched it has become in the daily entertainment habits of millions worldwide. Its focus on content quality, especially blockbuster originals and live events as of late, also gives Netflix a distinct advantage in attracting and retaining members. Meanwhile, the budding ad segment offers another growth lever that could keep pushing revenue and earnings higher over time.

Investors looking at Netflix should be aware of the risks, from intense competition to content cost pressures. However, it appears that Netflix has the right mix of strategy, brand power, and global positioning to keep its top spot for the foreseeable future. With ~302 million subscribers and rapidly rising, Netflix has clearly overcome the growth fears that plagued it just a few years ago. Though Netflix commands a premium valuation of $430 billion, the company continues to rewrite the script for what modern entertainment can be. Netflix truly appears to be pulling away from competitors this time and as such, investors should still consider Netflix a compelling long-term buy.