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Should You Buy Netflix Stock Right Now?

The Motley Fool
The Motley Fool
 2021-10-15
  • Netflix is trading at a price-to-earnings ratio near the lowest in five years.
  • Streaming still has a long way to grow vis-a-vis linear TV.
  • Netflix's scalable business model is on display with its expanding operating profit margin.

Netflix (NASDAQ:NFLX) essentially gave birth to the streaming content industry roughly 14 years ago and it has been reaping the benefits as a result. The stock price is up over 500% in the last five years. Its massive success has also attracted lots of competition, most notably Walt Disney.

Despite consumers having more streaming content options, they seem to be sticking with Netflix, suggesting the company can coexist with others as folks instead maintain multiple streaming subscriptions. That's good news for Netflix, as subscribers are the lifeblood of its business.

Let's consider that and other parts of its operating performance to determine if investors should consider buying Netflix stock right now.

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Image source: Getty Images.

Efficiently growing revenue

Netflix will be reporting its third-quarter earnings on Tuesday, Oct. 19. Management and analysts on Wall Street are nearly identical in their estimates for revenue and earnings per share for Q3. Netflix guided for revenue of $7.48 billion and earnings per share of $2.55, which would be increases of 16.2% and 46.5%, respectively, from last year.

The revenue growth rate will be a deceleration from last year, which is understandable. The company caught a significant tailwind during fiscal 2020 as hundreds of millions of people worldwide were suddenly spending more time at home because of the pandemic and demand for in-home entertainment surged.

Netflix has increased revenue rapidly over the last decade, achieving a compound annual growth rate of 27.7%. But just because revenue growth is somewhat decelerating, it doesn't necessarily mean profits are as well, thanks to Netflix's scalable business model.

Even as revenue leveled out a little this year, the operating profit margin increased from 4.3% in 2016 to 18.3% in 2020 and is expected to be even higher in 2021. That's because the cost to produce content stays roughly the same, whether you have 10 million subscribers or 200 million subscribers. Therefore, as Netflix increases its subscriber total, 209 million as of June 30, content costs decrease as a percentage of revenue.

Streaming could eventually overtake linear TV

Netflix is the beneficiary of a trend of people canceling their traditional linear TV subscriptions in favor of streaming instead. The latter is more convenient and less costly, and it gives consumers more options for where to consume their favorite movies and shows. Instead of forcing you to be in your home to watch, you can view it on your phone while on a train or bus. That trend is unlikely to reverse.

Still, it has a long way to go before Netflix has saturated its growth potential. According to Nielsen, streaming represents just 27% of U.S. screen time compared to 63% for linear TV. One of the downsides of streaming content is that folks need to have a good high-speed internet connection, which is not available in all parts of the U.S. and certainly not in all parts of the world. That could be one reason why streaming is still a minor part of overall viewing.

Should you buy Netflix stock?

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Data by YCharts.

Netflix is trading at a price-to-earnings ratio of 64.77, near the lowest it has sold for in the last five years (see chart). In addition to getting a company growing revenue and expanding profit margins, you can get Netflix at a relative bargain. Investors interested in adding Netflix stock to their portfolios can feel good about the decision.

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