Netflix may fail at achieving $1 trillion market cap: here's why

Netflix (NASDAQ: NFLX) is inching up this morning following reports that the streaming giant wants to double its revenue and triple its operating income by the end of this decade.

According to the WSJ report, the mass media behemoth also wants to hit a market cap of $1 trillion by 2030.

While its management’s commitment is admirable, the path to hitting these pompous targets is paved with uncertainty.

Several challenges could hinder NFLX’s ability to actually deliver on these promises within the next five to six years.

NFLX has to deal with competition and saturation

Netflix is often touted as the winner of the streaming wars.

However, it continues to face rather intense competition from the likes of Disney+, HBO Max, and Amazon Prime Video.

As its rivals continue to expand their content libraries and reach a broader set of audiences, NFLX could find it incrementally more challenging to grow its subscriber base and market share moving forward.

What’s also worth mentioning is that Netflix is already immensely penetrated in mature markets like the US and Europe.

For further significant growth, the Nasdaq-listed firm will likely have to rely more on international markets, which come with their own set of challenges, such as lower average revenue per user (ARPU).

Expanding into international markets like India and Brazil may also expose NFLX to regulatory hurdles, censorship issues, and geopolitical tensions – all of which could weigh on its growth plans.

Netflix has an expensive business model

Netflix has been immensely focused on producing original content to maintain its lead in the streaming space.

It’s a strategy that’s super impressive, albeit just as expensive.

With intensifying competition in the streaming sector, Netflix’s ability to hold its leadership position will hinge even more on its capacity to deliver distinctive, original content.

However, with more money potentially going to content production in the years ahead, Netflix’s pursuit of tripling its operating income by the end of this decade will have to be pushed to the background.   

Investors should also note that NFLX may have been successful with its advertising push, but that, nonetheless, is a business that tends to be super sensitive to economic downturns.  

Netflix stock is already trading at a premium

Finally, valuation concerns could also stand in the way of Netflix’s ambition to join the trillion-dollar club.

The price-to-earnings multiple on shares of the streaming giant currently sits at a tad below 50. In comparison, the average P/E ratio for the industry at large is about 25 only.

For NFLX to become a $1 trillion behemoth, it will have to grow at a compound annualised rate of about 21% through 2030, versus a sharply lower estimated CAGR of just 4.0% for the media and entertainment industry at large.

That’s part of the reason why analysts at Loop Capital are convinced that much of the good news is already baked into Netflix stock at about $970. Their 12-month price target for NFLX currently sits at $1,000 only.