Netflix (NASDAQ:NFLX) shares are up over 2,400% percent over the past decade. That's nothing short of amazing. For investors who got in early and stuck it out through the hard times, like the transition from mail to streaming, the rewards have been huge. But as the streaming industry has matured and faced increasing competition from more traditional media providers, Netflix may not be what it used to be. But then maybe it hasn't been what it used to be for a while now...
Obscured by big gains
A ten year return of 2,400% or so is the type of story that lures investors into all sorts of investments that don't, in the end, pan out. But you can't argue that Netflix is one of those companies. It truly took on the old world with a new business model and made it work. And in the process it has changed the face of media, from how it's consumed to how it's made to how it's delivered.
But those big price gains are the past. And they aren't always what they seem. For example, over the past five years the stock is "only" up about 155% or so. In that span, investors would have had to endure a 75% share price decline. Over the past year the stock is off around 15%, but 30% from its most recent highs in late 2015. Netflix isn't for the feint of heart.
You also need to juxtapose these results against other options. Hormel (NYSE:HRL), for example, was up around 150% over the past five years. It's up around 25% over the past year. And that's despite a year-to-date decline of nearly 10%. Over the past decade, Netflix is still the winner, since Hormel was only able to muster a roughly 300% gain over that span. But it did so without the big ups and downs that Netflix shareholders had to live through.
Stepping down from there, Coca-Cola (NYSE:KO) provided investors with an around 100% gain over the past decade, 25% over the five year span, and an about 7.5% gain over the past year. So far this year it's up around 1.5%, which, believe it or not, easily bests both Hormel and Netflix over that span.
The point of these comparisons is that the base numbers can hide things. For example, Netflix's long-term gains will remain huge because of the early years, but investors who got in after the big gains haven't done nearly as well and had to live through some tough spells performance wise. That doesn't change the fact that Netflix has helped to alter the media world as we know it, but that slow and steady Hormel and Coca-Cola have, at times, been the better options. And investors wouldn't have had to live through the same kind of harrowing ups and downs. And sometimes it's better to give up the potential upside to sleep well at night.
What's the future hold?
One of the big questions investors have to deal with now is whether or not Netflix's current falloff is a long term shift in the business environment or just a blip. It's not an easy question to answer. Inherently, Netflix's business model has to mature at some point because there are only just so many people in any given market to buy a subscription. And with more competition than when it first started, getting additional customers becomes harder and harder.
So there's only two big-picture ways for Netflix to really keep growing: find new markets and jack prices up. It's trying both, but it's hard to believe, from this point in time, that the company will be able to put up the same kind of growth it has in the past. Assuming that it can't, investors are likely to take a different view of the shares. Putting that another way, a 280 P/E may be agreeable for a company that's growing swiftly, but it isn't likely to hold if Netflix's growth slows down.
But what about Hormel and Coca-Cola? Coca-Cola is dealing with a slowdown in the carbonated beverage space, and that's been a problem. But its business is much broader than that, including everything from juice to sports drinks, and consumers aren't likely to stop drinking. Growth won't be robust, but it really hasn't been for years. And the P/E of 25 is clearly a more rational figure than 280. The same can be said of Hormel, which sells a host of staple foods and has been inching into new areas (Muscle Milk, for example). Growth probably won't knock your socks off, but with a P/E of 25 it's not as outlandishly priced as Netflix.
To be honest, I think Coca-Cola and Hormel are kind of expensive today and I wouldn't run out to buy either. However, such mature businesses can be a solid alternative to headline grabbing companies like Netflix. That's particularly true if you are a conservative investor. Even more so if you are late to the story for a story stock like Netflix, as the last five years shows. Who would have thought an investment in Hormel would have outperformed Netflix?
Sidestep the story
If you are looking at the sell off in Netflix and thinking it could be an opportunity to get in at a good price, you may be fooling yourself because of the maturation of the business. At the very least, you need to go in understanding that the ups and downs are probably going to be as exciting (scary?) as a roller coaster ride-just like they have been throughout the company's history. Moreover, because of the hefty valuation, there's likely more downside risk than upside potential if investors start to view the stock less favorably, a very real risk today.
If you are conservative, the recent share price drop at Hormel might actually be a better opportunity as it expands into new areas with better growth opportunities than its older businesses. Is it going to excite you? Probably not, this is a company who's best known product is Spam. However, it's shown a penchant for growth and ingenuity that's led to solid share price gains over time and a 50-year history of annual dividend increases.
If you are really conservative, though, Coca-Cola's plodding stock might be an even better idea. The soda giant has been shifting at the edges of late, but it always seems to keep moving with the times. And that's led to 54 years of annual dividend hikes. It will probably put you to sleep as an investment, but compared to the ups and downs at Netflix, that might be desirable.
Basically, exciting investments aren't always the best investments. And historical performance numbers can hide a lot if you don't think hard about a company, its business model, its history, and its potential future. I love my Netflix subscription, but I wouldn't buy the stock at this point. I think the big gains are likely to be in the past and, even if they aren't, I'm sure I'm not cut out for the ups and downs. Hormel is on my watch list, not Netflix.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.