# Sputtering Growth Engine
Netflix's glory days are behind them, I think. Through all of the 2010's, they had a dual engine growth machine in that they could raise prices and grow membership, simultaneously.
Member ship growth engine started sputtering in 2021 and in 2022, they only grew user count by 4%. Their answer was to crack down on password sharing...and it worked. In the following 3 years, they saw a 41% bump to their membership.
[IMAGE](https://preview.redd.it/netflixs-growth-engine-is-stalling-v0-ihpzavaqroeh1.png?width=1080&crop=smart&auto=webp&s=16aa5e55b18cc0a335f000c45b4460818af4b09c)
But that's a lever you can only pull once. User growth has since continued to decelerate.
# But it's still 26x earnings
Doing a reverse DCF, in order to justify today's price, earnings only have to grow at a mere 4% clip. I think that's a pretty easy target to hit. Price hikes alone can probably carry between 3-5% revenue growth for the foreseeable future. Membership growth is slowing, but it hasn't stopped completely. There's international expansion, ad revenue, and potential AI related cost saving measures that can all help as well.
And then there's operating leverage. You can get a dynamic where 3% revenue growth can power 8-10% earnings growth as long as revenue outpaces content creation expenses.
I didn't perform a full DCF for this one because Netflix is kind of at a transition point with their business. What will their content creation strategy be going forward - will they level off their content budget as their member counts stall? Or will they keep growing with pace?
One bullish scenario that I ran had a fair value around $130, and assumed the following:
* 4% subscriber growth for the next 10 years
* 4% ARPU growth
* 1% Content growth cost per user (so 1% on top of the 4% user growth)
* 2% opex growth per user
For that particular scenario, I estimated a ***5-year expected return CAGR of 23%***.
In general, I think even modest expectations could see 15% returns over the next handful of years.
[Substack Source](https://riskpremiumresearch.substack.com/p/netflix)
