Investors should expect even greater returns in the future thanks to the same reasons that are currently pushing these companies upward.
Following impressive earnings announcements, Netflix (NFLX -1.12%) and Ulta Beauty (ULTA -0.23%) have smashed the market during the past six months. Recently, Ulta reached a new all-time high, and Netflix has risen by more than 100 percent from its 52-week low. However, the substantial advantages enjoyed by both firms should make these rapid increases seem trivial in a decade’s time.
Here are some reasons why these growth stocks are attractive today.
Netflix’s subscriber totals unexpectedly dropped at the beginning of 2022, but the streaming service quickly recovered and returned to growth in the third and fourth quarters of that year.
The share price has rebounded significantly from its lows, and this may signal the beginning of a period of rapid expansion for the market leader in streaming media.
Netflix’s ability to generate market-leading profits despite spending more than $17 billion per year on original programming is a major competitive advantage. That kind of investment ensures that the site will always have plenty of new material to attract paying users.
Management’s attention has shifted from expanding the company’s membership to speeding up its revenue growth.
Netflix’s freshly introduced $6.99 monthly subscription package with advertisements is already successful. Additional subscribers have signed up, and the new membership tier is performing well, according to management. In 2023, it anticipates only a little boost in sales from this new product, but it anticipates significant growth in revenue thereafter.
The introduction of premium account sharing is another factor. Over a hundred million households, according to management, have joint bank accounts. A significant sum of money is being lost in this scenario. Netflix anticipates an increase in cancellations in the short term while it implements this approach but expects revenue growth to accelerate later in the year as more subscribers begin paying.
Additionally, Netflix’s financial line should benefit from advertising and paid-sharing efforts. Earnings per share (EPS) growth of 15% in 2023 is anticipated, with a further acceleration to 26% growth in 2024.
Although not inexpensive, the stock’s forward P/E ratio of 31 is respectable for a leading entertainment brand with widening margins and above-average growth potential, which the company has.
Ulta is more than just a store—it also provides a full-service salon for its customers. The stock has outperformed the market over the past decade, returning 400%, and may do so again over the next decade.
Despite a drop in sales while stores were closed due to the pandemic, Ulta increased its earnings per share by 337% and its revenue by 752% during the past decade. A strong revenue increase of 17% year over year was recorded for the third quarter, with comparable store sales increasing by 14% and profitability increasing by a fantastic 35%.
Ulta’s growth trajectory will continue unabated despite intense competition from online retailers because of the company’s distinct advantages.
The company’s broad product offering is a strength because it increases the odds of success in attracting new consumers and expanding the company’s market share. Ulta has the widest range of beauty goods, with over 25,000 products from over 600 brands.
It also boasts a large and devoted customer base of over 39 million people. When beauty items are an established staple in a consumer’s budget, this can be a very effective growth strategy. Managers noted an increase in third-quarter per-member spending across all income tiers.
The majority of Ulta’s revenue comes from the sale of beauty and hair care items, but the company sees the biggest development in more specialized areas like skin care. In addition, Ulta’s salon service was a major contributor to the company’s great performance in the services industry during the previous quarter.
Ulta Beauty has a solid history and enormous growth potential, but Wall Street is grossly undervaluing both. The stock has touched new highs, and yet it trades at a low 22 times earnings, which is the same as the average of the S&P 500. That’s a steal, considering the difficulties faced by the economy and the fact that it has led to this expansion in the industry.