In the past couple of decades, the stock market has had a tremendous run. That tailwind has been the perfect recipe for the creation of numerous trillion-dollar companies. These businesses are in an elite category.
Investors are certainly familiar with a smaller innovative, industry-leading enterprise that currently has a market cap of $384 billion (as of March 13). It has quickly climbed up the ranks. And I believe it deserves to be mentioned as a potential new entrant to the trillion-dollar club at some point in the future.
Can this one unstoppable stock join Apple, Microsoft, Nvidia, Amazon, Alphabet, and Meta Platforms in the $1 trillion club by 2035?
A category leader
If it's not already, Netflix (NFLX 3.13%) should be on investors' radars. Its shares have catapulted 66,600% higher in the past 20 years, undoubtedly making it one of the best performers during that time.
That monumental rise only happened because Netflix completely disrupted the traditional media market. The company deserves credit for having created the streaming industry as we know it today.
It focused intensely on innovation to find a way to offer customers a better experience compared to cable TV. As a result, Netflix surely should be talked about in the same breath as those other tech titans.
The company's growth has been unbelievable. Five years ago, it counted 167 million customers. Today, that figure has ballooned to 302 million, with a presence in 190 countries. Revenue has soared as well, going from $20 billion in 2019 to $39 billion last year.
Even at its current size, the business is trying new things to keep the growth going. Netflix has cracked down on password-sharing households. It has introduced a cheaper ad-based tier to target a price-sensitive customer. And it's starting to get more involved in live events and sports.
Netflix's profitability is noteworthy. The company's huge scale, which comes from its first-mover advantage, puts it well ahead of its rivals in the industry.
In 2025, executives are targeting a 29% operating margin, with free cash flow expected to total $8 billion. These numbers would represent an improvement from the prior year.
Netflix has also proved that it has pricing power. The leadership team strives to keep adding more value for subscribers, providing the confidence needed to occasionally raise prices.
NASDAQ: NFLX
Key Data Points
Getting to $1 trillion
The market cap only needs to rise 160% to reach $1 trillion in 10 years. In the past decade, Netflix's market cap has climbed 1,320%. Expecting a slowdown is reasonable, in my opinion.
Valuation matters, too. The stock currently trades at a price-to-earnings ratio (P/E) of 45.3. Let's assume the multiple contracts to 25 by 2035, which is not out of the question given the mature phase Netflix will be in then. Earnings per share (EPS) will need to grow by 16.7% per year to get to a $1 trillion market cap.
Again, EPS has risen at a much faster clip in the past decade. So, it's not crazy to believe that based on its trajectory, the company will enter the $1 trillion club in 10 years.
Don't buy the stock
Netflix might be on a clear path to the trillion-dollar mark. However, investors shouldn't take that as a sign that the stock is an automatic buy. The valuation, at that P/E of 45.3, looks too steep. This is true even with the shares trading 15% off their all-time high from February.
No one is going to argue with the fact that its business is doing extremely well. But this reality is fully reflected in the valuation, which I think gives investors zero margin of safety. Netflix must exceed the already lofty expectations embedded in the stock price for investors to end up with a satisfactory result. Consequently, the best course of action is to wait for a much better valuation before buying.
