Netflix (NASDAQ:NFLX) represents the “N” in the FAANG cohort of top tech companies, which also include Facebook, Amazon, Apple, and Google’s parent company Alphabet.
But with a market cap of $236 billion, Netflix is also much smaller than its four FAANG peers. Apple is worth more than $2 trillion, Amazon and Alphabet are both worth over $1 trillion, and Facebook has a market cap of $955 billion. Could Netflix also join the 12-zero club within the next ten years?
The story thus far…
Netflix has reinvented itself several times since it was founded in 1997. It initially offered DVD rentals by mail, then expanded that model into a subscription service, and accumulated five million members by 2006.
Netflix launched its first streaming platform in 2007, which was subsequently offered on gaming consoles, set-top boxes, and Blu-ray players. It also launched its service internationally.
That expansion boosted Netflix’s audience to 25 million members by 2012. A year later it launched its first slate of original shows — including Orange is the New Black, House of Cards, and Hemlock Grove — to lock in its subscribers and reduce its dependence on licensed content.
Netflix hit 50 million members in 2014, 100 million members in 2017, and 209.2 million members in its latest quarter. That massive audience makes it the world’s largest paid video streaming platform.
Between 2010 and 2020, Netflix’s annual revenue rose from $2.16 billion to $25.0 billion. Its net income surged from $161 million to $2.76 billion.
The challenges ahead…
Netflix still enjoys a first-mover’s advantage in premium streaming videos, but it currently faces a growing list of formidable competitors. The biggest threat is Disney (NYSE:DIS), which owns a massive portfolio of first-party content and offers its services at lower prices than Netflix.
Disney+, the company’s flagship platform, has already accumulated nearly 104 million subscribers since its launch in late 2019. By comparison, it took Netflix’s streaming platform ten years to hit 100 million subscribers. Disney expects Disney+ to reach 230 million to 260 million subscribers by the end of fiscal 2024.
Disney also owns Hulu and ESPN+, which served 41.6 million and 13.8 million subscribers, respectively, last quarter. Hulu hosts more mature content than Disney+, while ESPN+ streams live sports — a frequently requested feature that Netflix still doesn’t offer.
Other challengers include Amazon’s Prime Video, AT&T‘s HBO Max, Apple TV+, and stand-alone streaming services from traditional TV networks. This ongoing fragmentation of the streaming market could limit Netflix’s pricing power, make it more difficult to gain new subscribers, and force it to spend even more money on expensive original shows and movies to retain its existing audience.
Netflix has already been exploring new ways to differentiate its platform. It’s licensing more anime content and expanding its children’s programming, and it even launched an online store to sell tie-in merchandise. It’s also planning to expand into video games by offering free mobile games to subscribers.
The road to $1 trillion
Netflix’s stock has rallied about 1,200% over the past decade. But to cross the $1 trillion mark, it needs to more than quadruple in value.
Analysts expect Netflix’s revenue to rise 19% to $29.7 billion this year, then grow 15% to $34.2 billion next year. Netflix’s growth will likely decelerate afterwards, for two simple reasons: It’s saturating its developed markets like the U.S., and it faces too much competition around the world.
But let’s assume Netflix continues to roll out compelling original content, locks in more users with niche content like anime, and expands its digital ecosystem with video games and online merchandise.
If Netflix’s revenue growth meets analysts’ expectations for the next two years and continues growing at an average rate of 10% from 2023 to 2030, it could generate $73.3 billion in annual revenue by the final year. If Netflix is still trading at about eight times sales, it would be worth nearly $600 billion.
If Netflix grows it revenue at an average rate of 15% from 2023 to 2020, it would generate $104.6 billion in annual revenue by the final year. At eight times sales, it would still fall short of the $1 trillion mark.
But Netflix’s price-to-sales ratio will likely decline if investors think its high-growth days are over, which would result in much lower market caps. Investors should take a look at Netflix’s Chinese counterpart iQiyi, which trades at just two times this year’s sales and about 30% below its IPO price, to see what happens when a high-growth streaming video platform loses its momentum.
The key takeaways
Netflix’s growth over the past decade has been stellar, but much of its success can be attributed to its first-mover’s advantage in the streaming market. However, that advantage will likely fade over the next decade as competitors like Disney carve up the market. Netflix should keep growing over the next decade, but its chances of joining its FAANG peers in the trillion-dollar club by 2030 are slim.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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