A company with its stock rocketing over 500% is obviously doing something right, given the average-long run annual return from the stock market lingering close to 10% before inflation. To no one’s surprise, entertainment company Netflix Inc. and tech firm NVIDIA Corporation have achieved that remarkable rally.
Having conquered the market in their time as publicly traded companies, with Netflix up by 11,700% and NVIDIA with 6,100% since their initial public offerings (IPO), the two firms’ most recent performances are simply the usual business for these growth companies.
Over the last five years, what factors drove the sharp upward moves in both stocks, and can they continue this upward trend in the year to come after having soared so high already?
Dominating the streaming industry: Netflix
The world's well-known streaming company, Netflix Inc. has helped lead in several of the most vital changes to the streaming industry and proven itself a remarkably flexible and visionary player along the way.
Netflix has come so far from its origins that some would easily forget how groundbreaking the company’s original DVD-by-mail business model was. This played a role in disrupting the big-box video-rental model of companies like Blockbuster, which is now non-operational.
But Netflix’s next steps could be considered its most impressive, displaying how its unique culture let it reach where the metaphorical media puck was headed. Predicting the end of the DVD era, Netflix moved headlong into streaming media during a period when few other such services were available online. When rivals such as Amazon, Hulu, and others had followed suit, Netflix out-innovated its competitors by diving into original content.
Today, Netflix is running full steam ahead in its global domination for streaming subscribers. The service is available almost worldwide, besides China and a handful of failed states. It also seems the company will become highly profitable over the long term.
The NFLX stock isn't cheap, with shares currently trading at 332 times last year's earnings and 72 times this year's estimated earnings. However, with a total addressable market of roughly 6 billion potential customers, the evidence is hinting that Netflix can well continue to produce excellent returns, even as it grows in size.
Conquering the technology industry: NVIDIA
The California-based technology company finds itself today in the driver’s seat for some of the most vital coming trends in tech like autonomous cars, regardless of whether NVIDIA Corp. arrived at its current position out of accurate precaution or luck; maybe even both.
The graphic chip maker’s growth matches that of Netflix in a handful of ways. NVIDIA’s original innovation was the graphics processing unit (GPU), which the company and its CEO and found Jen-Hsun played a crucial role in developing.
NVIDIA initially focused on producing discrete GPUs, an industry term for a GPU that is not integrated with a computer's microprocessor (CPU), for the computer gaming industry. Today, this segment is still NVIDIA’s biggest revenue mine.
Although in the next years, the adoption of commercial artificial intelligence (AI) software and the dawn of autonomous cars should jointly boost the company’s long-term revenue growth. IDC, a research firm, deems that continued adoption of AI applications will result in a $47 billion industry for cognitive systems and AI software. In turn, NVIDIA will be the go-to provider of GPI chips.
AI chip sales made just $830 million in NVIDIA's previous four quarters. For autonomous vehicles, Intel CEO Brian Krzanich recently forecasted that self-driving cars account for a potential $110 billion total addressable market by the year 2030.
Similarly with Netflix, the NVDA stock is expensive at its current valuations: P/E of 39 and forward P/E of 30.
Keep in mind, however, the multi-decade nature of growth markets should easily let the chipmaker to grow into and even beyond its current valuation.
Growth stocks to keep
For such reasons and many more, NVIDIA and Netflix are both growth stocks to hold for the long term, even after comprising its remarkable returns over the years.
In the last session, the NFLX stock ended with a decrease of 0.57% or 81 cents to $141.84. Shares dipped by a meager 0.04% in after hours. On the other hand, NVDA lost 0.91% or 98 cents in Thursday’s session to $107.09, but recovered in afterhours trading with a 0.43% gain.
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