If you're like millions of other Americans your weekend may include catching up on your favorite shows on Netflix. But just because you watch Netflix, does that mean you should buy it?
Netflix certainly carries appeal for investors, even those who have never binge-watched an entire season in a single sitting. The most recent earnings report beat expectations, and the stock's value has climbed steadily for the past five years.
But before you go all-in on this streaming service, you should spend time asking yourself a few questions. Here's a basic overview of how to determine if Netflix stock will help build your financial future.
Is Netflix in it for the long haul?
Before investing in any company you need to make sure you aren't simply buying the hype. Sure, Netflix has been grabbing headlines recently, but will it continue to be as relevant for years to come? Unless you're looking to cash in on quick (and uncertain) profits, you should take a look at Netflix's plan for the future.
On one hand, as mentioned above, Netflix's most recent earnings report was full of good news for investors. The company added 29 million subscribers in 2018. That's 7 million more than 2017, and it brings the total number of paying subscribers up to about 139 million across 190 countries. That's a lot of eyes and a fair amount of growth momentum, as well. Pair that with a struggling traditional TV industry, and you've got a recipe for success.
On the other hand, some analysts are skeptical that Netflix will have the long-term growth potential of other tech stocks. Netflix is one of the most popular and most successful tech stocks, often tracked as a group called "FAANG," which stands for Facebook, Apple, Amazon, Netflix and Google (otherwise known as its parent company Alphabet). However, some argue Netflix lags behind other FAANG stocks in long-term potential. Whereas streaming was a major shift in the TV industry, that disruption is behind us. How will Netflix radically transform the media landscape going forward?
Weigh these factors and decide for yourself whether you think Netflix is a good long-term investment. Wherever you fall on this issue, keep up with developments through the Netflix Media Center, and make sure the company's plan doesn't change.
What are the upsides to Netflix stock?
If you're reading this you probably already watch Netflix. That's the best way to approach an investment: through the user's experience rather than through the investor's experience. If you own stock in a manufacturing company you might not notice small company changes until those changes have already taken their effect on stock prices. But if Netflix updates the layout to its streaming app or otherwise modifies the user experience, daily users may notice (for better or worse) before Wall Street does.
Investing in the future
As much as Netflix dominates the TV industry in the U.S., an incredible amount of potential growth is up for grabs. Streaming services are now battling for eyeballs around the world. Speculation about how many of those eyeballs Netflix will be able to turn into paying subscribers is now a common topic for analysts. In 2017 Netflix made headlines with its plan to spend $8 billion on original content the following year. This year Netflix has nearly doubled its original content budget, up to $15 billion. That kind of purchase freedom and commitment to investing in the future shows that, as long as there's the opportunity for growth, Netflix stands a chance of achieving it and enjoying the huge financial impact that results.
Netflix's CEO, Reed Hastings, also co-founded the company. Decades of continuous leadership provides stability within the company, which permeates the business and soothes investors. When CEOs leave analysts usually expect investors to sell off stock. The fact that Hastings is still around and doesn't appear to be on his way out anytime soon is a definite upside for Netflix stock.
What are the downsides to Netflix stock?
As much opportunity as there is overseas and as successful as Netflix has been in the U.S., there's very little opportunity left here domestically. Netflix currently has about 60 million subscribers, and it's aiming for as many as 90 million. However, the company's year-over-year growth has slowed from 17% in 2014, to 10.6% last year. Netflix now has two problems. For one, there isn't much of an untapped market anymore. Any potential U.S. customers have already heard about Netflix and decided against subscribing (whether because of lack of interest, lack of funds, etc.). Secondly, it's not uncommon for potential U.S. customers to opt against paying for their own account, and borrowing login information from a friend or family member instead. One study found that less than 70 percent of Netflix users actually paid for their own subscription.
Stock may be overvalued
At the end of 2018 a Goldman Sachs research note pointed out that, when you compare the price of a stock to its per-share earnings, tech stocks are the most overvalued they've been since the 2000 tech bubble. Netflix is no exception. Recent estimates suggest a share in Netflix stock costs 53 times more than it's expected to earn this year. The average stock's value is about 20 to 25 times its earnings. As long as investors have faith in the company's potential, that's not necessarily a bad thing, but if investor faith ever wavers and that ratio is still out of whack, it could potentially result in a massive sell-off.
You can't win them all
There are plenty of international growth opportunities, but it won't be easy to seize all of them. Netflix faces several challenges as it aspires toward global expansion. To use Netflix, customers need internet access, but according to the World Bank, less than 60 percent of upper middle class people around the world have internet. Netflix originals like Bird Box and Haunting of Hill House have demonstrated the company's potential to create popular content in the U.S., but that hasn't happened overseas. Without hit TV shows and movies in the country Netflix will have few negotiation skills to flex in foreign markets. There's one notable exception here: the Mexican film "Roma." That movie has become a smash hit around the world, earning 10 Oscar nominations this year and selling out theaters despite the ability to stream the movie from home. Its limited theater release didn't put "Roma" in serious contention with its widely released competition like Ralph Breaks the Internet or Creed II. Still, estimated earnings of up to $120,000 on its opening weekend lands "Roma" among the best-selling foreign-language films.
How do I buy Netflix stock?
This article is a great starting point for research, but dig deeper before considering yourself fully informed. Seek out strong opinions, both positive and negative, and compare their points to concrete data from Netflix's earnings reports.
Review your portfolio
Even if you decide Netflix is a good bet, that doesn't mean it'll fit into your overall financial portfolio. Do you have enough seed money, not for everyday use, set aside for protecting your family in case of disaster? If you're already heavily exposed to tech stocks, for example, you might want to think twice about adding Netflix until you've balanced that out a bit.
Pick a broker that fits your trading strategy
Broker fees vary from institution to institution, but they all have their own benefits and drawbacks. Some offer more research tools and smoother user experiences in exchange for higher broker fees. Others cater to beginning traders by reducing (or eliminating) broker fees, though there may not be as many stocks to choose from or information about those stocks. If you're looking to invest small amount, consider a broker that lets you buy partial shares of a stock.
Pick an order type
Once you decide how much you want to buy, you need to decide whether you want to place a market order or a limit order. Market orders are the quickest, so this is the best type of order to place if you're trying to take advantage of current events. Even though it's quick, there is a delay. During that delay the actual price of the stock may rise or fall. If you want a more certain price, place a limit order. Whatever your preferred method of investing, this will be the final step before acquiring the stock.
Set reminders to revisit your investment (if you decide to buy)
Buying shares doesn't mean you can stop planning for the future. Remember to check back in on your investment and follow company developments. Set price reminders so you can sell if the stock's value gets too inflated or buy more if the stock's value dips.