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3 Great Reasons to Buy Netflix

As one of the world's leading media entertainment businesses, Netflix (NASDAQ: NFLX) has been a lucrative stock to own. Over the past decade, shares have skyrocketed almost 3,000%, absolutely crushing the market during that time. This large-cap company is now valued at $260 billion.

There are a lot of things to like about Netflix. And while future returns may not be as extraordinary as in the past, the stock still looks like a good buy today. Here are three reasons you should consider adding shares of this streaming giant to your portfolio.

Image source: Getty Images.

1. First-mover advantage

A big reason Netflix has been so successful is simply because it was the first company in the streaming space. Co-founder and co-CEO Reed Hastings was convinced that the internet was going to fundamentally change how people consumed video entertainment, so he positioned Netflix to invest aggressively to acquire as many customers as possible before other companies took the market seriously.

Netflix is planning to spend $17 billion in cash on content in 2021, which is far greater than any of its competitors. With 209 million subscribers and $27.6 billion in trailing-12-month revenue, this makes complete economic sense because the business is able to spread out the massive cost over the most customers.

Good luck to the smaller rivals who are late to the streaming party and trying to play this game. Not only will they need tons of capital (from raising debt), but they'll now have to compete for eyeballs in an incredibly crowded field. The merger of AT&T's WarnerMedia division with Discovery is a telltale sign that scale is necessary in this industry. More consolidation is likely in the future, demonstrating Netflix's dominance.

2. Pricing power

There is perhaps no topic that has garnered more attention from financial media lately than inflation. The unexpected surge in consumer demand following the depths of the pandemic has led to higher commodity prices, supply chain issues, and labor shortages. Netflix's ability to raise prices consistently over time protects it from any potential inflationary pressures, a characteristic many corporations wish they had.

Last October, Netflix raised monthly prices by $1 for its standard plan and $2 for its premium plan. In the first full quarter following that hike, management cited improved levels of engagement compared to the prior-year period. And since Netflix first started this initiative of bumping up prices in 2014, membership has only soared. From year-end 2014 to today, customer count has jumped 264%.

This is a company that can survive any economic environment, including the short-lived recession last year and the recent inflation worries, primarily because it continues increasing the value it offers to consumers. "If we do a good job there, then ultimately...we have the ability to go back and occasionally ask some of those members to pay a little bit more to keep that virtuous cycle going," COO Greg Peters said on the most recent earnings call. Pricing power is a wonderful thing to have.

3. Adding subscribers

Certainly, the biggest concern on Netflix shareholders' minds today is the dramatic slowdown in subscriber growth -- 5.5 million -- during the first six months of this year. Compare that to 2020, when the company added a whopping 36.6 million customers as everyone stayed home. No doubt, a tough act to follow. But what matters most is Netflix's ability to add paying subscribers over the long term.

MoffettNathanson, a large research firm, believes Netflix will end 2025 with close to 375 million members. Unsurprisingly, most of this expansion will come from the Asia-Pacific region. In particular, the company is making a huge push in India, investing hundreds of millions of dollars to release 40 local productions in the country over the coming year.

And Netflix's recent foray into the video-game market is an example of how the company wants to truly become a global leader in video entertainment. While customers won't be charged more for this feature, it should only drive higher levels of engagement and attract newer subscribers to the service.

Although this stock has made early investors very rich over time, I don't believe the days of market-beating performance are over. Netflix's first-mover advantage, pricing power, and growth plans make it a solid buy right now.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Discovery (C shares). The Motley Fool has a disclosure policy.


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