Netflix(NASDAQ: NFLX) completely upended the entertainment industry by introducing streaming video to the masses. Thanks to its tremendous success, the business has been a huge winner for investors. In the past two decades, shares have skyrocketed 15,720%.
This streaming stock is now one of the world's most high-valuation enterprises, with a market cap of $244 billion. But it still has the potential to continue rewarding shareholders in the long run. With that being said, can Netflix become a trillion-dollar company by 2035?
Netflix's next scene
The company's ascent has been nothing short of amazing. By creating a better user experience, one focused on convenience and broad content choices, Netflix has registered unbelievable growth. Revenue in 2023 of $33.7 billion was up 666% from a decade before. The current subscriber base of 270 million has climbed astronomically higher over the years.
But the Netflix of today is a far different animal than the one from the past. The company's service is reaching a more mature stage in its key markets, particularly in the U.S. And the leadership team just announced that it will stop reporting quarterly subscriber numbers starting next year, instead prioritizing revenue growth and engagement.
Investors shouldn't be concerned, though. The business added 9.3 million net new subscribers in the first quarter, while posting a revenue gain of 14.8%. Netflix is finding tremendous success in new areas that it previously didn't focus on. The ad tier reported 65% quarter-over-quarter membership growth, signaling a real interest from people looking for a cheaper option. Netflix also launched a campaign to crack down on password sharing, requiring users to sign up for their own accounts.
Besides these two successful moves, the company is venturing into new content opportunities. Of note is the recent deal signed with TKO Group to bring Raw to Netflix starting next year. There are also reports swirling that Netflix might bid for the rights to stream NBA games. Getting into live sports is something that the executive team said would never happen. We'll see if this actually comes true.
Despite its monumental rise over the past decade, Netflix is still staring at a sizable expansion opportunity. Management estimates that there are about 500 million smart-TV households worldwide (this figure doesn't include China, where Netflix isn't available). This gives the company plenty of room to slowly grow its user base and revenue potential.
From a financial perspective, Netflix has never been more lucrative. Critics always called out how much money the company was spending on content, believing that Netflix would never start producing cash. That was the wrong view.
After generating $6.9 billion of free cash flow in 2023, management expects to produce $6 billion this year. This is the money left over after Netflix invests in content. Netflix has now implemented a share buyback policy, returning excess cash to shareholders.
Expect a slowdown
As of this writing, Netflix sports a market cap of $244 billion. For the company's valuation to rise approximately four-fold over the next 11 years, it implies an annualized increase of about 13%. That's not a wildly bullish outcome.
In the past 10 years, Netflix's market cap soared by more than 1,100%. It's safe to assume this growth rate will slow down dramatically going forward.
Even so, I think joining the exclusive $1 trillion club is within the realm of possibility. Netflix trades at a price-to-sales ratio of 7.2, which is in line with its trailing 10-year average. If this multiple remains the same, which is anyone's guess, the business needs to grow revenue by about 13% per year between now and 2035. If it can, the company's market cap can get to $1 trillion.
It's not impossible to believe that can happen.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool recommends TKO Group Holdings. The Motley Fool has a disclosure policy.
