Netflix is a buy for capital gains

Netflix is a buy for long-term share price gains, provided that you need no dividends and can accept share price risk.

netflix

Popular proprietary content keeps members loyal and thwarts competitors.

We’ve added California-based Netflix Inc. (NASDAQ—NFLX) to the list of ten broadcast-related stocks we regularly review on The Back Page.

Netflix “is the world’s leading streaming entertainment service with 208 million paid memberships in over 190 countries enjoying TV Series, documentaries and feature films across wide-ranging genres and languages. Members can watch as much as they want, anytime, anywhere, on any Internet-connected screen.” In fact, that’s why some have ‘cut the cord’ and no longer get cable TV. The only major market that forbids Netflix is China.

Entertainment during lockdown

Restrictions on movement in many countries and quarantines kept lots of people cooped up at home. Many signed up with streaming services for entertainment. This has shown up in Netflix’s financial results.

In 2021, Netflix’s earnings are expected to leap by more than 73 per cent, to US$10.54 a share. Based on this estimate, the shares trade at a high P/E (price-to-earnings) ratio of 48.5 times. Next year, Netflix’s earnings are expected to advance by 22.9 per cent, to US$12.95 a share. Based on this estimate, the shares trade at a better P/E of 41 times. As long as Netflix’s earnings continue to grow quickly, paying a high P/E ratio can be justified.

Netflix reinvests in its business

Netflix fails to pay dividends. That’s largely because it reinvests its earnings back into the business. For instance, the company has become a significant producer of content. Highly popular proprietary content, in turn, can keep members loyal and thwart competitors’ attempts to steal its business. We expect Netflix to eventually pay dividends.

Netflix is a buy for long term share price gains. But only providing that you need no dividends.

This is an edited version of an article that was originally published for subscribers in the July 30, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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