Like a puppy chasing its tail, some new investors often chase ‘the next big thing’, even if that means buying ‘story stocks’ without revenue, let alone profit. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Netflix (NASDAQ:NFLX). Now, I’m not saying that the stock is necessarily undervalued today; but I can’t shake an appreciation for the profitability of the business itself. In comparison, loss making companies act like a sponge for capital – but unlike such a sponge they do not always produce something when squeezed.
Netflix’s Improving Profits
Over the last three years, Netflix has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don’t think the percent growth rate is particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. It’s good to see that Netflix’s EPS have grown from US$2.28 to US$2.64 over twelve months. That’s a 16% gain; respectable growth in the broader scheme of things.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. While we note Netflix’s EBIT margins were flat over the last year, revenue grew by a solid 27% to US$18b. That’s a real positive.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Netflix.
Are Netflix Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$138b company like Netflix. But we do take comfort from the fact that they are investors in the company. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$2.1b. This suggests to me that leadership will be very mindful of shareholders’ interests when making decisions!
Does Netflix Deserve A Spot On Your Watchlist?
One important encouraging feature of Netflix is that it is growing profits. If that’s not enough on its own, there is also the rather notable levels of insider ownership. The combination sparks joy for me, so I’d consider keeping the company on a watchlist. If you think Netflix might suit your style as an investor, you could go straight to its annual report, or you could first check our discounted cash flow (DCF) valuation for the company.
You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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