Netflix: Streaming’s Dominant Force with More Growth Ahead

Netflix is the dominant force in streaming, backed by a strong brand, a vast content library, and continuous innovation. With strategic expansions into advertising, live events, and video games, the company is building new revenue streams to sustain long-term growth. However, rising competition, increasing content costs, and low switching costs present challenges. The question is: Should Netflix be part of your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Netflix. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in Netflix's competitors either. Thus, I have no personal stake in Netflix. If you want to purchase shares or fractional shares of Netflix, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Netflix is one of the world’s leading entertainment services, offering TV series, films, and games to over 300 million paid members across more than 190 countries. The company pioneered streaming entertainment, shifting from a DVD rental service to an on-demand platform that has transformed the way people consume content. Subscribers can watch anytime, anywhere, with a personalized interface that curates recommendations based on individual viewing habits, reinforcing engagement and retention. Netflix has built a strong competitive position through its vast content library, global reach, and technological innovation. The company produces a growing slate of original programming, ranging from blockbuster series to critically acclaimed films and documentaries. Its investment in exclusive content - backed by a multi-billion-dollar annual budget - strengthens customer loyalty and reduces reliance on third-party licensing. The ability to release full seasons at once and experiment with different storytelling formats has made Netflix an attractive platform for top creative talent, offering greater flexibility than traditional TV networks. The company benefits from a significant brand moat. Netflix is so widely recognized that it has become embedded in pop culture, with the phrase "Netflix and chill" serving as a testament to its cultural impact. This deep brand association reinforces its position as the default choice for streaming entertainment. Management has also highlighted Netflix’s competitive advantage in a recent earnings call, emphasizing that it sees itself as a unique product that cannot be easily replaced by alternatives. International expansion has further strengthened Netflix’s position. The introduction of non-English-language originals, including productions from Mexico, France, and South Korea, has enabled Netflix to resonate with diverse audiences while reinforcing its dominance in global markets. The company’s ability to turn regional hits into global phenomena - such as Squid Game and Money Heist - demonstrates the power of its worldwide distribution model. Netflix’s move into an ad-supported tier has introduced an additional revenue stream, making the service more accessible to price-sensitive consumers while diversifying its business model.

Management

Netflix has two co-CEOs, Ted Sarandos and Greg Peters, who bring complementary expertise to the company’s leadership. Ted Sarandos first joined Netflix in 2000 and became co-CEO alongside co-founder Reed Hastings in 2020. In addition to his role as co-CEO, he serves as Netflix’s Chief Content Officer, leading the company’s expansion into original programming. Under his leadership, Netflix launched its first original series in 2013 and has since developed a vast portfolio of hit content, including Stranger Things, Squid Game, La Casa de Papel, The Witcher, The Irishman, and ROMA. Ted Sarandos has been widely recognized for his influence in shaping modern entertainment, previously earning a spot on Time magazine’s 100 Most Influential People list. Internally, he is well-regarded by employees, with an 81/100 rating on Comparably, placing him among the top 5% of executives at similarly sized companies. Greg Peters joined Netflix in 2008 and was appointed co-CEO in January 2023 following his tenure as Chief Operating Officer and Chief Product Officer. He has played a key role in Netflix’s global expansion, overseeing partnerships with consumer electronics companies, internet service providers, and distributors that ensure seamless access to Netflix across devices and platforms. He was instrumental in launching Netflix’s ad-supported tier and has been actively involved in scaling the company’s gaming initiatives. In addition to his role at Netflix, Greg Peters serves on the boards of 2U Inc. and DoorDash. While still relatively new in his co-CEO role, his extensive experience in operations, technology, and strategic partnerships suggests he will be a key driver of Netflix’s long-term growth. The co-CEO structure at Netflix balances creative leadership with operational expertise. Ted Sarandos continues to focus on content strategy, while Greg Peters drives innovation in distribution, monetization, and international growth. This dual leadership approach reflects Netflix’s ambition to strengthen both its core entertainment business and its expansion into new revenue streams. Former CEO and co-founder Reed Hastings remains actively involved as executive chairman of the board, providing strategic guidance. I believe Netflix's management is well-equipped to lead the company into the future.

The Numbers

The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% every year. Historically, Netflix has had an underwhelming ROIC. However, the company has moved in the right direction since 2017, maintaining a 10% ROIC over the past five years and achieving its highest ROIC ever in 2024, which is encouraging. Several factors contributed to Netflix reaching its highest ROIC in 2024, including strong revenue growth and the expansion of new revenue streams, particularly from its advertising initiatives. As Netflix continues to scale its advertising business, ROIC is likely to improve further. While the company previously struggled with low ROIC, I am optimistic about its trajectory and expect it to sustain a high ROIC moving forward.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. These numbers are particularly encouraging, as Netflix has grown its equity year over year for the past 10 years, with the exception of 2023. Even more impressively, in the nine years that Netflix expanded its equity, it consistently achieved a growth rate above 10%. I am not overly concerned about the slight decline in equity in 2023, as Netflix has historically delivered strong performance. The company rebounded in 2024, reaching its highest equity level ever, reinforcing my confidence in its long-term growth trajectory.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Netflix has not consistently delivered the desired level of free cash flow that one would expect from a company worth investing in. Over the past ten years, Netflix reported negative free cash flow in six years. However, the company has maintained positive free cash flow every year since 2022, and management has stated that they expect this trend to continue. In both 2023 and 2024, Netflix generated approximately the same level of free cash flow. The primary reason free cash flow did not grow in 2024 was an increase in content investment compared to 2023. This higher spending also impacted the levered free cash flow margin, which declined year over year but still reached a respectable 17,7% - the second-highest level in Netflix’s history. Despite strong free cash flow generation, the free cash flow yield remains low, indicating that Netflix stock is trading at a premium valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within three years. Based on my calculation, Netflix has 1,58 years of earnings in debt, which is well below the three-year threshold. Therefore, debt is not a concern when investing in Netflix. As the company continues to improve its profitability, I do not expect debt to become an issue in the future.

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Risks

Competition poses a significant risk for Netflix due to the rapidly evolving entertainment landscape and the increasing number of options available to consumers. The company competes not only with other streaming services but also with a broad spectrum of entertainment choices, including social media, video gaming, and user-generated content. With consumers having a finite amount of time, Netflix must continuously convince them to choose its platform over countless alternatives. One of the key risks is the growing presence of both established media giants and tech companies in the streaming space. Competitors such as Disney+, HBO Max, and Amazon Prime Video have large content libraries, strong brand recognition, and substantial financial resources to secure exclusive content. Many of these competitors also have diversified revenue streams, allowing them to subsidize streaming investments in ways that Netflix, as a pure-play streaming company, cannot. Additionally, large tech firms such as Apple and Amazon, with deep pockets and existing ecosystems, are aggressively expanding their streaming businesses, making it increasingly difficult for Netflix to maintain its dominance. A major concern is the low switching costs in the streaming industry. Unlike traditional cable, where long-term contracts locked in subscribers, streaming services allow users to cancel and re-subscribe with ease. This makes customer retention challenging, as viewers can switch between platforms based on content availability, price, or promotional offers. Warren Buffett has remarked that "the streaming business is tough." His reasoning is that "people have only 24 hours in a day and two eyes," making it difficult to increase demand. This underscores a fundamental challenge for Netflix - streaming services do not operate in a market where consumption can grow indefinitely, leading to intense competition for consumer attention and subscription revenue.

Content acquisition and production costs pose a significant risk for Netflix, as the company must continuously secure high-quality content to attract and retain subscribers. With increasing competition in the streaming industry, the cost of acquiring and producing content has risen sharply, putting pressure on Netflix’s profitability. One of the primary challenges is that Netflix competes not only for viewership but also for the rights to premium content. Studios, independent creators, and content providers now have more distribution options, allowing them to demand higher licensing fees or retain exclusivity for their own streaming platforms. As major studios such as Disney, Warner Bros., and NBCUniversal continue expanding their direct-to-consumer services, they are less willing to license their most valuable content to Netflix. This limits Netflix’s ability to offer a diverse third-party library, forcing the company to rely more heavily on its own original productions. However, despite this shift, licensed content still plays a key role in subscriber retention, making it a challenge for Netflix to maintain a balanced and cost-effective content mix. Netflix’s push toward original content comes with significant financial risk. Creating high-quality films and TV series requires substantial upfront investment, with no guarantee of success. While some Netflix originals have become global hits, others have failed to gain traction, leading to sunk costs. Meanwhile, competitors are investing aggressively in exclusive content, raising the stakes for Netflix to keep its catalog competitive. The increasing bargaining power of studios and the industry-wide push for exclusive content continue to drive up costs, further straining Netflix’s ability to manage expenses efficiently.

Netflix’s ability to attract and retain subscribers is a critical factor in its long-term success, and failure to do so poses a significant risk to its business. Unlike traditional media companies that generate revenue through multiple channels, Netflix relies primarily on subscription revenue, making subscriber growth and retention essential. If Netflix struggles to maintain or expand its membership base, it could face declining revenue, reduced profitability, and difficulty justifying its high content investments. One of the primary challenges is that Netflix must consistently replace canceled memberships while also growing its total subscriber base. This task becomes increasingly difficult as Netflix reaches higher market penetration, particularly in mature markets where growth has slowed. In contrast, newer or less saturated markets offer more growth potential, but they come with their own challenges, such as differences in content preferences, regulatory hurdles, and lower consumer purchasing power. Churn, or subscriber cancellations, is a persistent risk. Members cancel Netflix for various reasons, including dissatisfaction with content, switching to competitors, needing to cut household expenses, or feeling they do not use the service enough to justify the cost. This issue is exacerbated by the fact that streaming services operate in an industry with low switching costs - users can easily cancel and resubscribe based on content availability or promotional offers. If Netflix cannot provide a steady stream of compelling content that keeps members engaged, it risks higher churn rates, making it more expensive to sustain revenue growth. Macroeconomic conditions also influence subscriber trends. Economic downturns, inflation, and reduced consumer spending power can impact discretionary expenses, including streaming subscriptions. If consumers cut back on spending, Netflix could see slower subscriber growth or even subscriber losses, particularly in price-sensitive markets.

Reasons to invest

Netflix’s expansion into live events represents a compelling reason to invest in the company, as it broadens the platform’s content offering, attracts new subscribers, and enhances engagement. Unlike traditional streaming content, live events generate real-time excitement and have the potential to drive immediate spikes in viewership. More importantly, these events create opportunities for Netflix to differentiate itself from competitors and reduce churn by keeping subscribers engaged between major content releases. A key factor in Netflix’s live event strategy is its ability to use these events as a gateway to its broader content library. Management has highlighted that many viewers who initially subscribed for a specific live event, such as an NFL game or a boxing match, remained engaged with other content on the platform. This demonstrates that live events are not just standalone attractions but serve as an effective funnel to retain subscribers and drive engagement with Netflix’s vast library of films and series. By integrating live content into its ecosystem, Netflix strengthens customer stickiness, making it more likely that new subscribers will transition into long-term users. Netflix’s strategic approach to live sports further supports its investment appeal. While the company has been cautious about acquiring full-season rights to major sports leagues due to challenging economics, it has selectively pursued marquee events that align with its business model. The success of its Christmas Day NFL games, which became the most-streamed NFL games ever with audiences of 30 million and 31 million, reinforces the potential of high-profile sports events to draw massive viewership. Additionally, its acquisition of WWE Monday Night Raw, set to stream exclusively on Netflix starting in 2025, adds a weekly live component to the platform, increasing user engagement and retention. WWE’s historical under-distribution outside North America presents an opportunity for Netflix to attract more international subscribers, leveraging its global reach to expand the franchise’s footprint. Beyond acquiring existing sports programming, Netflix is leveraging its expertise in sports storytelling to enhance its live event offerings. Management has hinted at the potential to develop shoulder programming around WWE, similar to its successful sports docuseries such as Drive to Survive, Full Swing, and Quarterbacks. This multi-layered approach not only strengthens engagement but also extends the lifetime value of its sports investments.

Netflix's advertising business is emerging as a compelling reason to invest in the company, providing a significant new revenue stream while making its service more accessible to a broader audience. The rapid growth of its ad-supported plan, combined with advancements in its ad tech infrastructure, positions Netflix to capture a meaningful share of the $25 billion connected TV (CTV) advertising market. One of the most important aspects of Netflix’s advertising strategy is that it attracts and retains a wider range of subscribers. By offering a lower-priced, ad-supported tier, Netflix is expanding its addressable market and appealing to price-sensitive consumers. Notably, engagement levels among ad-supported users are similar to those of standard non-ad subscribers, indicating that the lower price point does not compromise viewing habits. This makes the ad tier an effective tool for both subscriber acquisition and long-term retention. The financial impact of Netflix’s advertising business is also gaining traction. Netflix doubled ad revenue in 2024 and expects to double it again in 2025, underscoring the scalability of its ad model. As the company continues expanding its ad-supported tier and refining its ad technology, advertising is poised to become a significant contributor to Netflix’s overall revenue and profitability. A key driver of future growth is Netflix’s transition to its own ad tech stack. In 2025, the company plans to expand its proprietary ad server beyond Canada to all 12 of its ad-supported markets, starting with the U.S. This shift gives Netflix greater control over ad delivery, targeting, and measurement, enabling more flexible buying options for advertisers while improving the overall ad experience. Early results from Canada have been promising, with management reporting increased ad revenue following the transition. Additionally, management has stated that the margins on the advertising business are expected to remain very high.

Netflix’s expansion into video games presents a compelling investment opportunity as the company taps into a massive global market while strengthening engagement and retention among its subscribers. The gaming industry represents approximately $140 billion in consumer spending (excluding China and Russia), and Netflix is positioning itself to capture a portion of this market by integrating gaming into its broader entertainment ecosystem. While still in the early stages, the company’s strategic approach to gaming shows promising signs of becoming a meaningful long-term growth driver. One of the biggest advantages of Netflix’s gaming strategy is its ability to create a virtuous cycle between video games and its original content. Games based on popular Netflix IP, such as Squid Game: Unleashed, Too Hot to Handle, Emily in Paris, and Selling Sunset, allow fans to extend their engagement with their favorite shows, reinforcing their connection to both the interactive and non-interactive sides of the platform. Management has highlighted that Squid Game: Unleashed reached the No. 1 ranking in action games in app stores across 107 countries and is on track to become Netflix’s most downloaded game. This success validates the company’s approach of using gaming as a tool to enhance fan loyalty and drive continued engagement. Netflix is also diversifying its gaming portfolio beyond content-based tie-ins. The company has begun offering major third-party franchises, such as Grand Theft Auto, which generated tens of millions of downloads, signaling strong demand for recognizable titles on the platform. Additionally, Netflix differentiates itself from traditional gaming platforms by offering games with no ads and no in-app purchases, providing a frictionless experience that adds value to its subscription model. From a financial perspective, Netflix’s current investment in gaming remains relatively small compared to its overall content budget, yet the company is already seeing positive effects on subscriber acquisition and retention among members who engage with games. While these effects are currently modest, management remains disciplined in scaling its investment based on observed member benefits. As Netflix expands its gaming portfolio and improves discoverability, the impact on engagement and retention is likely to grow over time, reinforcing the company’s ability to maintain subscriber loyalty in an increasingly competitive streaming market. Looking ahead, Netflix aims to launch bigger and more ambitious games every year, steadily increasing its presence in the gaming industry.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 19,83, which is from the year 2024. I have selected a projected future EPS growth rate of 15%. (Finbox expects EPS to grow by 26% in the next five years, but 15% is the highest number I use.) Additionally, I have chosen a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on the fact that Netflix has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $594,90. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Netflix at a price of $297,45 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company is essentially its return on investment. The minimum annual return should be at least 10%. I calculate it as follows: The operating cash flow last year was 7.487, and the capital expenditures were 362. I attempted to analyze their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 253 in our calculations. The tax provision was 1.254. We have 427,76 outstanding shares. Hence, the calculation will be as follows: (7.487 – 253 +1.254) / 427,76 x 10 = $198,43 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Netflix's free cash flow per share at $16,19 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $255,57.

Conclusion

I believe that Netflix is an intriguing company with strong management. The company benefits from a competitive moat through its brand, vast content library, global reach, and technological innovation. While Netflix has historically struggled with disappointing ROIC, it achieved its highest ROIC ever in 2024. Free cash flow has also been a concern, with the company only delivering positive free cash flow in four of the past ten years. However, Netflix has been free cash flow positive for the last three years, and management expects this trend to continue. Competition remains a significant risk, as Netflix faces intense rivalry not only from other streaming platforms like Disney+, HBO Max, and Amazon Prime Video but also from social media, video gaming, and user-generated content, all vying for limited consumer attention. Content acquisition and production costs are another major challenge, as Netflix must continually invest in high-quality content while competitors aggressively pursue exclusive deals. With major studios prioritizing their own streaming platforms and licensing fees rising, Netflix faces increasing financial pressure to balance third-party licensing with costly original productions, making profitability more challenging. Additionally, Netflix’s ability to attract and retain subscribers is critical to its long-term success, as it relies primarily on subscription revenue to fund its content investments. With increasing market saturation, low switching costs, and economic pressures affecting consumer spending, Netflix must continuously deliver compelling content to minimize churn and sustain revenue growth. Despite these challenges, Netflix’s expansion into live events enhances its content offering, attracting new subscribers and increasing engagement by creating real-time excitement and a gateway to its broader library. Its advertising business has also emerged as a growing revenue stream, providing access to price-sensitive subscribers while delivering strong revenue growth and high-margin potential. Meanwhile, Netflix’s expansion into video games presents a long-term growth opportunity by tapping into a $140 billion industry, integrating games based on popular Netflix IP and major third-party titles to strengthen customer loyalty. Overall, I believe there are many reasons to like Netflix, and it remains the strongest company in the streaming industry. However, given the low switching costs for its customers, I require a margin of safety in my valuation. I believe buying shares at $476, which represents a 20% discount to my intrinsic value estimate, would present a good long-term investment opportunity.

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