Netflix (NFLX -0.51%) and Ulta Beauty (ULTA 0.13%) have crushed the market over the last six months following strong earnings reports. Ulta hit a fresh all-time high recently, and Netflix is up well over 100% from its 52-week low. But both companies benefit from key advantages that should make even these rapid climbs look insignificant in another 10 years.
Here's why investors should consider these growth stocks today.
1. Netflix
After a rough start to 2022, when subscriber totals took a surprise turn in the wrong direction, Netflix bounced back by returning to subscriber growth in the third and fourth quarters. The stock is up sharply off its lows, but this could be the start of a new chapter of growth for the leading streaming service.
A key advantage for Netflix is its ability to produce industry-leading profitability while spending over $17 billion annually on new content. That high spending will always keep the platform well stocked with fresh content to win new subscribers.
With the company back to increasing its member base, management is now focused on accelerating revenue growth.
Data by YCharts. TTM = trailing 12 months.
Netflix just recently launched its ad-supported subscription plan for $6.99 a month, which is already proving to be a win for the company. Management reported incremental new sign-ups and positive performance metrics for the new subscription tier. While it expects modest contributions in 2023 from this new offering, it should drive higher revenue over the next several years.
Another catalyst is the rollout of paid account sharing. Management estimates that over 100 million households share their accounts with others. That's a lot of revenue being left on the table. Netflix expects higher cancellations in the near term as it rolls this initiative out, but as more viewers start paying up, it should accelerate revenue increases later in the year.
Most importantly, the advertising and paid-sharing initiatives should be accretive to Netflix's bottom line. Analysts currently expect it to increase earnings per share (EPS) by 15% in 2023 before accelerating to 26% in 2024.
Even after the rebound in the stock, it still trades at a reasonable forward price-to-earnings (P/E) ratio of 31, which is not cheap but still fair for a leading entertainment brand with expanding margins and above-average growth prospects.
2. Ulta Beauty
Ulta is a leading retailer of beauty products and operates its own salon service. The stock delivered a market-beating return of 400% over the last 10 years, and it could deliver a comparable return over the next 10 years too.
Looking back over the last decade, Ulta grew revenue and EPS by 337% and 752%, respectively, despite the plunge in revenue during the pandemic when stores were closed. In the third quarter, it reported strong revenue growth of 17% year over year with comparable-store sales up 14% and earnings up a stellar 35%.
Data by YCharts.
Despite competition from e-commerce, Ulta has advantages that ensure its growth trajectory will remain intact.
One key advantage for the company is its vast selection of products, which widens the net to win over more customers and gain market share. Ulta claims to have the largest selection of beauty products with over 25,000 items from more than 600 brands.
It also has a successful loyalty program with 39 million members. This is a powerful tool to drive growth when beauty products are already a recurring expense for customers. Management reported seeing higher spending per member across all income demographics in the third quarter.
Ulta generates most of its business from cosmetics and hair care products, but it's seeing the fastest growth in smaller categories such as skin care. The company also experienced strong performance in its services business last quarter, driven by its salon service -- another way Ulta differentiates its store experience from that of competitors.
Wall Street is severely undervaluing Ulta Beauty's strong track record as well as its growth potential. Even as the stock hits new all-time highs, it trades at just 22 times earnings, matching the S&P 500 average. That's a bargain for this industry-leading growth in a challenging economy.
