If you ask someone whether a company carrying a 300X price-to-earnings (P/E) multiple is a good investment, the answer is probably “no.” But stranger things have happened in the stock market. In the case of Netflix, Inc. (NASDAQ:NFLX) stock, the answer might actually be “yes.”
Sure, Netflix stock doesn’t look that appealing at the moment. After being the top gainer on the S&P 500 last year, the stock started to fall and even touched the low $80.00s earlier this month. But as Warren Buffett’s mentor Benjamin Graham says, Mr. Market is often irrational. And when Mr. Market is in a pessimistic mood, there might be an opportunity.
So, is there an opportunity in NFLX stock? Let’s take a look.
NFLX Stock: Material Global Profits in 2017?
When a stock has such a high price-to-earnings ratio, investors are betting on future growth. And on that front, Netflix has got it covered.
In the past, critics have always used the argument that Netflix’s user growth in the U.S. is slowing down and the company would not open to new markets fast enough. To their surprise, Netflix didn’t just enter a couple new markets; it is launching in 130 countries at once!
At this year’s Consumer Electronics Show (CES) in Las Vegas, Netflix CEO Reed Hastings announced that the company is becoming almost fully global. With the new markets added, Netflix is now available in 190 countries around the world. (Source: “Netflix is Now Available Around the World,” Netflix, Inc., January 6, 2016.)
Of course, opening up to new markets doesn’t translate to huge profits immediately. But given the popularity of Netflix’s content, growth in new markets might come sooner than you think. According to the company’s forward guidance, Netflix expects “material global profits beginning in 2017.” (Source: “Q4 15 Letter to Shareholders,” Netflix, Inc., January 19, 2016.)
But what about competition? Well, when it comes to on-demand video streaming, no one has a larger footprint than Netflix. Amazon.com, Inc.’s (NASDAQ:AMZN) “Amazon Video” is only available in a handful of countries, while Hulu is only available in the U.S.
When looking at the company, investors should consider all contingencies. In the future, there might be a big challenge for on-demand video streaming companies.
You see, as online streaming becomes the go-to choice for viewers, traditional TV networks are taking a hit. As a result, some TV producers might decide not to give streaming companies timely access to their shows. (Source: “TV Producers May Start Making You Wait for New Shows Online,” Associated Press, February 8, 2016.)
No doubt, this would not be good for companies in the video streaming business. But Netflix would still be better off than its rivals. Why? Because all this time, the company has been building up a giant library of original content.
Do the titles House of Cards, Narcos, or Marvel’s Daredevil sound familiar to you? Well, they’re all Netflix originals.
The most impressive part is that Netflix earned eight Golden Globe nominations this year. That’s not just more than Amazon or Hulu, but more than any other TV network. (Source: “Golden Globes Nominations 2016: Complete List and Analysis,” The Washington Post, December 10, 2015.)
The point is that Netflix is not just a content distributor anymore; it’s a heavyweight content creator as well. This means the company doesn’t need to rely that much on television producers. Netflix’s shows have their own following.
The Bottom Line on NFLX Stock
At the end of the day, remember that Mr. Market is there to serve you, not to guide you. The sentiment surrounding NFLX stock might get more optimistic soon or it might not.
The bottom line is that Netflix’s growth could very well continue. And with “material profits” realizing soon globally, the company represents a great opportunity for those who want a piece of the action in the on-demand video streaming business.