Netflix (NASDAQ:NFLX) began the century as a small company mailing CDs. Today Netflix stock represents the most valuable pure entertainment company in the world. Netflix also earns cloud-like margins.
Some $2.3 billion of nearly $9.4 billion in revenue became net income in the first quarter of 2024. This is not a coincidence. Cloud technology powers Netflix. Netflix doesn’t own a cloud, but it makes better use of clouds than anyone else.
A Closer Look at Netflix Stock
Netflix has had a program called Open Connect since 2011. It’s a content delivery network that brings the shows Netflix sells closer to its customers.
Those under 40 may forget that Internet Service Providers resisted early streaming efforts. They had good reason. If 1 million customers were streaming Netflix shows through your network, you had to make 1 million connections to Netflix’s central servers.
Open Connect makes this unnecessary. It caches Netflix content at local internet offices so an ISP only has to download it once. This reduces its costs and can bring in hosting revenue. It also makes Netflix more reliable.
The Netflix Strategy
Open Connect has the scale for Netflix to offer live programming, the last linear TV exclusive. It can now go after sports events it previously shunned. Important to note that its first set of comedy shows were produced with concert promoter Live Nation.
Netflix is also becoming multiple services, replicating cable at a fraction of cable’s price. A deal to produce faith-based shows may have flown under the radar, but this can be one tentpole for a new type of content.
Netflix began its streaming life with comparisons to WBD’s Home Box Office. It’s now in the process of becoming Comcast.
Instead of paying $150/month and more for a cable subscription, viewers can spend $25/month with Netflix and never leave it. It’s time that is the gating factor for all entertainment, not money. Netflix now has so much content media that it has to offer guides to it.
Netflix is also going into retail. These aren’t stores, but event spaces offering dining and entertainment as well as Netflix-themed retail. One of the first is replacing a 120,000 square foot Lord & Taylor in Pennsylvania.
The Bottom Line
Before you make any long-term investment, you should understand the story behind the company you’re buying into.
That said, rushing out a buy order when the market is hot will leave you short of profit. At 41 times earnings and 7.3 times sales, Netflix stock is fully valued.
The good news is that the stock is volatile. We have seen two good buying opportunities go by in the last year, in May and last October. At the market’s last bottom in June 2022, Netflix sold below $200 per share. It’s now at about $600.
It makes this the kind of idea you put in your back pocket for the next time traders scream “sell.” When they do, buy and hold.
As of this writing, Dana Blankenhorn had a LONG position in AMZN and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.