i was skeptical Netflix (NFLX 2.72%) I had been buying one for years, but 2023 was the year I finally started warming up to the idea of buying one. First, I needed some stocks to replace my long-term losing positions in the market. Walt Disney (DIS 0.33%), has finally retreated after a recent rally. Over the past year, since I put Disney on the chopping block, Netflix has clearly outperformed, which has cost me late decisions.
In fact, with the exception of Netflix, many of the traditional media industries are currently disrupted. This is what ultimately led me to pull the trigger on Netflix, even though the stock has doubled in the last year.
Data by YCharts.
Netflix is profitable in every way right now
As I’ve explained for years, despite being a Netflix subscriber, I couldn’t bring myself to own a part of the business itself due to its low profitability. Granted, Netflix has been showing GAAP net income for quite some time.But on a free cash flow basis (which includes the amount paid to the company to create content compared to GAAP net income, which amortizes this important expense over time), Netflix clearly Unprofitable.
But that all changed in 2023. As Netflix has grown, the last year has been extremely profitable in every way. Free cash flow is currently generated at an even higher rate than GAAP net income.
Data by YCharts.
Of course, the market is also paying attention to Netflix’s improved profitability, with the stock price rising significantly since the beginning of 2023. The stock currently trades at a premium of 50 times, or nearly 40 times, trailing 12-month earnings. Free cash flow for the past 12 months. Surely it’s too late to buy now, right?
years of make a profit Awaiting expansion
Netflix’s subscriber base continues to grow. This media business is well-positioned because of fewer national borders than the traditional U.S. television business, and because of Netflix’s steady investment in diverse content over the years. Total subscriber numbers in Q4 2023 increased by 13% year-on-year to more than 260 million.
But the world is still very large, and Netflix still estimates its share of global viewing time at just a single-digit percentage. With subscription prices also continuing to rise and an advertising business currently being built, Netflix is on track to eventually become more similar to traditional cable today (where consumers can watch whatever they want, whenever they want). Except you can choose more carefully). Nevertheless, the main reason why Netflix will be able to maintain its low-teens revenue growth rate in the coming years is still the steady increase in subscribers.
Chart source: Netflix.
Along the way, management said it intends to continue increasing profit margins gradually. On a free cash flow basis, 2024 is expected to be similar to the $6 billion the company generated in 2023. This comes as Netflix recovers from a pause in content production in the US due to last year’s actors and writers strike. However, despite this short-term outlook, Netflix remains a profitable company and has plenty of cash to fund its expansion plans.
Shareholders are now also compensated. Netflix returned $6 billion of that cash last year through stock buybacks. This is another reason to be optimistic about the outlook, despite the stock’s high valuation.
Overall, things have changed dramatically for Netflix, with healthy growth emerging from the bear market of the last few years. and A profitable media business. I plan to buy more Netflix stock as the year progresses.
Nick Rossolillo and his clients have positions at Netflix. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.
