Netflix (NFLX -1.12%) and Ulta Beauty (ULTA -0.23%) have crushed the market over the past six months following sturdy earnings stories. Ulta hit a contemporary all-time excessive not too long ago, and Netflix is up nicely over 100% from its 52-week low. But each firms profit from key benefits that ought to make even these speedy climbs look insignificant in one other 10 years.
Here’s why traders ought to take into account these progress shares as we speak.
After a tough begin to 2022, when subscriber totals took a shock flip in the incorrect route, Netflix bounced again by returning to subscriber progress in the third and fourth quarters. The inventory is up sharply off its lows, however this could possibly be the beginning of a brand new chapter of progress for the main streaming service.
A key benefit for Netflix is its skill to produce industry-leading profitability whereas spending over $17 billion yearly on new content material. That excessive spending will all the time maintain the platform nicely stocked with contemporary content material to win new subscribers.
With the corporate again to growing its member base, administration is now targeted on accelerating income progress.
Netflix only recently launched its ad-supported subscription plan for $6.99 a month, which is already proving to be a win for the corporate. Management reported incremental new sign-ups and optimistic efficiency metrics for the brand new subscription tier. While it expects modest contributions in 2023 from this new providing, it ought to drive increased income over the subsequent a number of years.
Another catalyst is the rollout of paid account sharing. Management estimates that over 100 million households share their accounts with others. That’s a number of income being left on the desk. Netflix expects increased cancellations in the close to time period because it rolls this initiative out, however as extra viewers begin paying up, it ought to speed up income will increase later in the 12 months.
Most importantly, the promoting and paid-sharing initiatives must be accretive to Netflix’s backside line. Analysts at the moment anticipate it to enhance earnings per share (EPS) by 15% in 2023 earlier than accelerating to 26% in 2024.
Even after the rebound in the inventory, it nonetheless trades at an inexpensive ahead price-to-earnings (P/E) ratio of 31, which isn’t low cost however nonetheless honest for a number one leisure model with increasing margins and above-average progress prospects.
2. Ulta Beauty
Ulta is a number one retailer of magnificence merchandise and operates its personal salon service. The inventory delivered a market-beating return of 400% over the past 10 years, and it may ship a comparable return over the subsequent 10 years too.
Looking again over the past decade, Ulta grew income and EPS by 337% and 752%, respectively, regardless of the plunge in income throughout the pandemic when shops have been closed. In the third quarter, it reported sturdy income progress of 17% 12 months over 12 months with comparable-store gross sales up 14% and earnings up a stellar 35%.
Despite competitors from e-commerce, Ulta has benefits that guarantee its progress trajectory will stay intact.
One key benefit for the corporate is its huge number of merchandise, which widens the web to win over extra clients and acquire market share. Ulta claims to have the biggest number of magnificence merchandise with over 25,000 objects from greater than 600 manufacturers.
It additionally has a profitable loyalty program with 39 million members. This is a robust software to drive progress when magnificence merchandise are already a recurring expense for purchasers. Management reported seeing increased spending per member throughout all earnings demographics in the third quarter.
Ulta generates most of its enterprise from cosmetics and hair care merchandise, however it’s seeing the quickest progress in smaller classes corresponding to skincare. The firm additionally skilled sturdy efficiency in its companies enterprise final quarter, pushed by its salon service — one other approach Ulta differentiates its retailer expertise from that of opponents.
Wall Street is severely undervaluing Ulta Beauty’s sturdy monitor document in addition to its progress potential. Even because the inventory hits new all-time highs, it trades at simply 22 occasions earnings, matching the S&P 500 common. That’s a cut price for this industry-leading progress in a difficult financial system.
John Ballard has positions in Netflix. The Motley Fool has positions in and recommends Netflix and Ulta Beauty. The Motley Fool has a disclosure policy.