Risk And Reward In Netflix Stock

Netflix (Nasdaq: NFLX) is a spectacular success story. Back in the year 2009, the company was making only $1.67 billion in annual revenue. Fast forward ten years and Netflix is expected to produce $20.23 billion in sales during 2019.


Data by YCharts

The most recent earnings report from Netflix shows that the company keeps firing on all cylinders. Total revenue during 2018 amounted to $15.8 billion, growing by 35% versus 2017. Operating margins are also moving in the right direction. Operating income nearly doubled year over year to $1.61 billion.

Netflix gained 8.8 million new paid members in the fourth quarter of 2018, surpassing the company's expectations and representing acceleration in growth versus 6.07 million additions in the third quarter of 2018 and 6.62 million in the fourth quarter of 2017. For the first quarter of 2019, management is expecting 8.9 million global streaming net paid additions.

Source: Netflix Investors Letter

Growth typically slows down as a company gains size over time because it's obviously much harder to sustain rapid growth in percentage terms from a larger revenue base. However, Netflix is not only still growing at an impressive speed, but user growth is even accelerating versus prior years and quarters.

The company's strategy of betting on original content and international expansion is clearly producing results, at least when it comes to top-line expansion.

Rising Margin And Falling Cash Flows

Netflix management puts a lot of attention on contribution margin when evaluating profitability levels. This is basically calculated as revenue less cost of revenue and marketing expenses incurred by the segment.

Based on contribution margin, profitability metrics are quite solid. Netflix reported a contribution margin of 29.6% in the U.S. and 3.9% in international markets during the fourth quarter of 2018. In the first quarter of 2019, those contribution margins are expected to increase to 34.2% and 9.8% in the U.S. and international markets, respectively.

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Disclosure:  I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: I wrote this article myself, and it ...

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