This Disruptor Could Beat 499 S&P 500 Stocks In 2017

Michael Vodicka's picture

Tuesday, February 7, 2017 - 11:30am

by Michael Vodicka

Netflix (Nasdaq: NFLX) is one of those stocks that investors either love or hate. It's hated because of its high valuation, but it's loved because, despite that high valuation, it has continued to crank out huge returns.

In the last five years, shares are up 675%. Check out the huge move in the chart below.

 

Today, I'm going to explain why Netflix remains a great pick for investors looking for growth. In fact, I am predicting that Netflix will be one of the top performing S&P 500 stocks in 2017.

Management Has Made Netflix The Most Dynamic Company In The S&P 500
Netflix has one of the best management teams in the S&P 500. The company has completely disrupted three separate industries in the last 15 years, an important move in a global economy that's changing faster than ever.

In the late 1990s, Netflix began sending movies to customers through the mail. That sounds ridiculous in the era of smartphones, but back in the day it was a radical idea that eventually led to the bankruptcy of industry heavyweight Blockbuster.

When it became apparent streaming was the future of content distribution, Netflix was one of the first to market with its streaming service in 2007.

Once again, Netflix hit a home run. Its streaming service has rocked the traditional cable industry, giving birth to the term 'cord cutter' after millions of cable customers dropped their $150 per month cable subscription and signed up for Netflix.

Today, Netflix is at it again. The company is disrupting the movie and television industries by investing billions into content production and launching huge hits that are available exclusively through Netflix. That includes popular shows such as House of Cards, Narcos, Orange Is the New Black, and Stranger Things.

The strength of Netflix content was just on display at the Screen Actors Guild Awards. Netflix crushed the competition by winning four awards, more than any other producer.

That's amazing. Netflix wasn't involved in content production five years ago. Today, long-time movie and TV producers are looking at Netflix with envy over the quality of its shows, its popularity and profitability.

Looking forward, Netflix is set to hugely ramp investments in content. It is set to invest $6 billion in content in 2017, up from $1 billion in 2016. That should help Netflix develop more than 1,000 hours of programming, up from 600 in 2016.

This move into content is looking like another home run. With much of the same movie and show content available across different streaming services, original content is already a major point of differentiation between Netflix and virtually all other streaming services other than Amazon (Nasdaq: AMZN). That gives Netflix a huge leg up against the competition.

International Markets
Netflix continues to see respectable user growth in the United States. It added 1.9 million subscribers in the last quarter of 2016 and expects to add another 1.5 million in the first quarter of this year.

However, international markets represent a bigger opportunity.

Back in January of 2015, Netflix CEO Reed Hastings announced a plan to accelerate the company's international growth. At the time, Hastings said he wanted Netflix to basically be available anywhere in the world. It was an ambitious goal.

In January of 2016 at the Consumer Electronics Show in Las Vegas, Hastings impressed the crowd when he announced Netflix had beaten its goal and was now live in 130 new countries. That move tripled the number of countries Netflix operated in and made the service available in just about every major country in the world.

In 2016, Netflix continued advancing in international markets. For example, it made its service payable in local currencies in Poland and Turkey while also adding local language interfaces. These are the smaller brush strokes that drive subscription rates.

The big push into international markets is paying off. Netflix added 5.1 million international customers in the fourth quarter and expects to add another 3.7 million in the first quarter of 2017. Revenue in the fourth quarter hit a new all-time high, breaking $8 billion for the previous  12 months.

Looking forward, I'm expecting more of the same. Earnings are expected to grow around 150% in 2017 to $1.05 per share. Earnings are expected to double again in 2018 to $2.00 per share. Based on those strong growth projections, Netflix's P/E ratio does not seem quite as high.

Netflix Looks Like A Great Acquisition Target
Here's a wild card prediction on Netflix. I still think Netflix looks like a great acquisition for a large technology or media company.  Both industries are searching for new sources of growth and have hundreds of billions in cash to deploy into an acquisition.

Back in October of 2016, rumors were swirling that Apple (Nasdaq: AAPL) and Disney (NYSE: DIS) were both interested buyers. Although a deal never transpired, Netflix offers the same benefits today: A powerful global brand, loyal and passionate customers, easy integration, and low-cost scalability.

The buyout rumors have died down for the time being, but I expect them to pick up again. For potential suitors, I see Google, Amazon and Disney. I would expect any buyout offers to come in at a 20% to 25% premium to Netflix's share price.

Risks To Consider: The biggest knock you'll hear on Netflix is that shares are overvalued. Netflix does have a high P/E ratio. But I think this company still has plenty of growth ahead that justifies its higher valuation.

Action To Take: Netflix is expanding into international markets and investing billions into producing original content. I believe this sets the stage for the company to deliver record revenue and earnings for years to come. Buy shares anywhere below the all-time high and hold for the long haul.

Editor's Note: America's most successful tech investors are getting ready to make MILLIONS off 2017's virtual reality breakthroughs. But they're not investing in what you think...

Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.