It may surprise you that every dollar you invest in a superb growth stock can end up generating great wealth.
A strong business can continue growing both its top and bottom lines over the years.
And with growing profits, investors are also willing to pay a higher share price for the business.
It’s an interesting exercise to look back 10 or more years ago to see how much a dollar could have multiplied had you stayed invested in the same stock.
We performed this exercise with United Overseas Bank Ltd (SGX: U11), or UOB, late last year and also with Singapore Technologies Engineering Ltd (SGX: S63), or STE, in the middle of last year.
UOB provided a 10-year compound annual growth rate (CAGR) of 7.9% while STE yielded a 12-year CAGR of 4.9%.
Let us now look at Netflix (NASDAQ: NFLX) to figure out how much you would have today if you had invested in the streaming TV giant back in 2013.
A solid compounder
To perform this exercise, let’s assume you purchased close to US$1,000 worth of Netflix back in February 2013.
Netflix’s share price on 22 February 2013 stood at US$25.69, adjusted for a 7-for-1 split that the company conducted in June 2015.
You would have purchased around 38 shares of the streaming giant with your budget.
Fast forward to 2023, and Netflix is now trading at US$337.50.
Your 38 shares will now be worth US$12,825, a more than 14-fold increase from the original US$976.22 that you invested.
On a compound annual growth rate (CAGR) basis, Netflix’s shares have returned an impressive 29.4% per annum over the last decade.
This level of return greatly exceeds even the elevated core inflation rate of 4.1% in 2022 and demonstrates how Netflix has been a solid compounder of capital.
Of course, the question on investors’ lips will be – can the streaming giant continue to deliver?
After all, investors cannot enjoy past growth but should, instead, look to the company’s prospects as to whether it can continue to outperform.
Still a market leader
Netflix remains a market leader in the streaming industry.
According to research firm Nielsen, Streaming TV currently makes up 38.1% of total viewing for December 2022, with broadcast and cable making up a quarter and 31%, respectively.
Of the 38.1%, Netflix came in second at 7.5% with only YouTube (under Alphabet (NASDAQ: GOOGL)) seeing a higher share of 8.7%.
Netflix’s streaming competitors Disney (NYSE: DIS) and Amazon (NASDAQ: AMZN) are still far behind with a market share of 1.9% and 2.7%, respectively.
Netflix is also solidly profitable and has been growing its member base despite it exceeding the 200 million mark.
For 2022, the company reported a net profit of US$4.5 billion while generating a free cash flow of US$1.6 billion.
The number of members has continued to increase, posting a 4% year on year growth to 230.7 million for the fourth quarter of 2022 (4Q 2022) despite seeing two consecutive quarters of decline back in 1Q and 2Q of 2022.
A content creation machine
A strong point about Netflix is its commitment to broadening its slate of content to continue attracting larger audiences.
The company has released an impressive variety of movies and TV series that cover different regions and are in different languages.
This wide portfolio of content, which also covers different genres ranging from romance to suspense/horror, allows the service to appeal to a multitude of people from around the globe.
Some examples of its most popular non-English TV series and movies include All of Us Are Dead from Korea and Troll (Norway), Black Crab (Sweden) and My Name is Vendetta (Italy).
Its slate of English-language TV series includes the popular Stranger Things 4 and Wednesday, along with movies such as The Gray Man and Purple Hearts.
Get Smart: Standing on the shoulders of a giant
It seems that Netflix still has what it takes to be a strong compounder in the future.
The company dominates the streaming TV industry and its focus on generating engaging content means it can continue to endear itself to viewers.
Furthermore, Netflix has also recently introduced a lower-priced ad-supported tier in 12 countries to offer greater choice to people who cannot afford a regular subscription, helping to broaden its revenue streams.
The company is also making good progress on its new gaming initiative, with a total of 50 games across multiple genres and acquiring four games studios to boost its internal production capabilities.
Netflix was a great compounder over the past decade but the company could continue to deliver great returns moving forward.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.