Netflix completes 15-years since it went public, registering a five-figure percentage return along the way! According to the company’s investor relations site, anyone who had invested $1,000 in Netflix shares on its May 23, 2002 IPO and held onto the holdings so far, has earned a return of more than +14,000% (taking into account dividend reinvestments and stock splits). Beneath the eye-popping returns, is a journey no less dramatic. From renting out DVDs in the U.S. to becoming a leading online video streaming portal globally– it has been quite a roller-coaster ride for Netflix.
A Life Full of Drama
Netflix was founded in 1997 as a DVD rental-by-mail firm in the U.S. In 2000, it offered itself up for acquisition to then-video rental giant Blockbuster – but the deal did not go through since Blockbuster reportedly did not want to pay $50 million for a fledgling firm. And just two years later, Netflix made its IPO and raised $82.5 million from it. By 2003, it garnered more than 1 million subscribers of its video rental service and made its first-ever annual profit.
In 2007, Netflix took a big leap, which turned out to be its trump card, it expanded into online video streaming of full-length TV shows and movies. This one move helped position Netflix as a prominent force in the evolution of our television viewing habits. Among the first line of hour-long TV series to feature on its platform was ‘Mad Men’ in 2011 and ‘Breaking Bad’ in 2012, with the latter’s mass popularity reportedly soaring after it began streaming on Netflix.
In between, some cable TV networks apparently felt so threatened by Netflix’s potential to chip away at their markets that they started to hike charges for licensing their content. Some others like Starz even stopped renewing deals with Netflix.
But, that only pushed Netflix to stretch its wings even further – by venturing into original production/distribution (a second venture in this space, after it had closed down its independent films’ distribution venture, ‘Red Envelope Entertainment’ in 2006). Netflix bought David Fincher’s ‘House of Cards’ after outbidding TV industry giant HBO, and promising Fincher full commitment to two seasons with no pilot and zero interference. The series debuted on its site in February 2013, and the rest is history. Since then, the Netflix ‘original’ family has offered viewers many critically acclaimed/popular series such as ‘Orange is the New Black’, ‘Stranger Things’ and ‘Narcos’.
Even more dramatic is what appears to be Netflix’s drive towards ruling global viewership: starting with Canada in 2010, the company soon expanded its streaming services to include 60 more countries; and in early 2016, it zoomed its way into more than 130 new countries! Currently, more than 190 countries are binging on Netflix at present. As of the end of March 2017, the number of paid memberships for its international streaming was nearly +41% higher compared to the same quarter a year ago. The worldwide growth in Netflix paid memberships’ count was +21% over the same period.
Its rapid overseas investments have started to pay off as well: in Q1 2017, contribution profits from Netflix’s international streaming was +$42.6 million, following net losses from the segment in the previous quarters. (Based on data from Netflix Investor Relations site).
Are Investors Hooked to Netflix’s Growth?
In addition to the streaming behemoth’s aggressive growth strategies, its top- and bottom-line trends may have contributed to its stock price gains. Netflix’s total revenues (including all its businesses) have grown steadily over the years, although the path of its net income has not been as smooth in comparison. Intensifying completion and bidding wars with networks/other streamers and surging licensing costs may have pressured margins in some years. Nevertheless, earnings have been positive every quarter since Q2 2012. (based on Statista data)
Q1 2017 saw a big jump in earnings, bolstered largely by the firm’s streaming business, with a net income of $178 million – more than six times that of the same quarter in 2016.
Bottom Line for Investors
As Netflix completes its 15-years of aggressive expansion, there is no sign of the streaming giant slowing down. It has plans to invest an additional $6 billion into new content in 2017 – making it one of the top spenders on content in the media industry. This year, Netflix has also managed to gain some presence in the long-forbidden market of China, albeit with several restrictions attached. By signing an agreement with iQiyi (a subsidiary of China’s Baidu), Netflix will license some content to the Chinese streaming service.
Netflix’s 15-year returns indicate how investing for the long-term can yield solid rewards to shareholders. At the same time, every company’s journey is filled with ups and downs – and adequate portfolio diversification helps an investor cushion their nest egg against this roller coaster. So, don’t get blinded by the rags to riches company stories and sacrifice diversification for “falling in love” with a stock.
At Zacks Investment Management, we focus on the fundamentals. We leverage our in-house databases, software, models and completely unbiased research to build diversified portfolios, while also taking into consideration the individual needs and risk tolerance of each of our clients. And, our results speak for themselves. Five of our investment strategies are currently ranked in the top of their respective classes according to Morningstar. To get a sneak peek into these strategies, check out our Dean’s List of Investment Strategies. To get your free copy, click on the link below:
Disclosure