The Netflix Case Study: How to Spot a 100-Bagger Before It Takes Off

Blockbuster laughed. Netflix investors laughed all the way to the bank.

Fancy a 100,000% profit??

That's how much you'd have made if you bought Netflix at its IPO price and held until January 2020.

A 100-bagger.

And a few people did exactly that.

But most of us didn't.

Instead we sat there and said things like:

"Blockbuster will crush them."

"This is just a dot-com hype stock."

"They'll never make money shipping DVDs."

"They're spending way too much on content."

"The PE is too high."

And so we missed it. We watched from the sidelines as Netflix went up 1,000x.

So to avoid that from happening again…

This is the story of Netflix's journey to 100-bagger status - with a heavy dose of reality about what was and wasn't predictable along the way.

The Red Envelope Revolution

Let's go back to the beginning.

Netflix went public on May 23, 2002, at $15 per share. But the NASDAQ had crashed, and Netflix had to lower its initial target from $16-$18. The stock ended its first day of trading at $16.75.

By October 2002, the stock was trading at $5.51 - a 67% drop from the IPO.

Back then, Netflix was mailing red envelopes with DVDs inside them. That was the business. You paid a monthly fee, you got DVDs in the mail, you watched them, sent them back, and got new ones.

Did that seem like a 100-bagger to you?

It didn't to most people.

But here's what they missed:

Reed Hastings wasn't building a DVD business. He was building an operating system.

While everyone saw a DVD-by-mail company, Hastings was creating a way to consume entertainment that was fundamentally different.

The unlimited monthly subscription with no late fees was step one. But the company was already planning for digital streaming, years before the technology was viable for mass adoption.

From Netflix's 2002 annual report:

"We believe that eventually we will be able to deliver content to our subscribers in whatever form they desire."

That line was sitting there in plain sight. But nobody paid attention.

The First Doubling: What The Market Missed

By 2003, the company had 1 million subscribers.

By 2005, it had 3.6 million.

By 2007, it had 7.5 million.

The stock had climbed from $5.51 to around $25 by 2007 (split-adjusted).

But it wasn't just subscriber growth that mattered. It was the underlying economics:

Recurring Revenue Model: Netflix had moved the movie rental business from transactional to subscription.

Negative Working Capital: Customers paid upfront, but Netflix paid studios later.

Increasing Returns to Scale: As the subscriber base grew, Netflix gained more leverage with content providers.

Data Advantage: They were collecting data on viewing habits long before "big data" was a buzzword.

Low Churn: Once customers got used to the service, they rarely canceled.

These characteristics created a business with strong economics that got stronger with scale.

The Fateful Pivot: Streaming Changes Everything

In 2007, Netflix launched streaming.

At first, it was just a small feature - a bonus for subscribers who were primarily DVD customers. The selection was limited, and the quality was poor.

But Hastings saw that physical media would eventually die. While Blockbuster was busy trying to copy Netflix's DVD-by-mail model, Netflix was already working on what would kill the DVD business.

By 2009, Netflix had 10 million subscribers and the stock was trading around $50.

By 2011, it had 23 million subscribers and the stock was pushing $300.

That's when it made one of the most controversial decisions in corporate history: it split its DVD and streaming businesses and raised prices.

The stock crashed 80%.

Subscribers left in droves.

Financial media called it "Qwikster" - a catastrophic failure.

But here's what most people missed: this was the right move for the long-term.

Hastings knew that trying to prop up the DVD business would be like "selling horse carriages in the age of the car." As he put it in the now-famous apology letter: "I messed up. I owe everyone an explanation."

Despite the apology, he didn't reverse course on the strategy. He just improved the execution.

The Content Revolution: From Middleman to Media Empire

While Netflix was recovering from the Qwikster debacle, it was quietly working on another transformation: from content distributor to content creator.

In 2013, "House of Cards" was released - Netflix's first major original series. The company spent $100 million on the first two seasons.

Wall Street analysts thought they were crazy. Why would a distribution platform spend so much on content?

Because Hastings knew something fundamental: content that drove subscribers was worth multiples of its production cost over time.

The math was simple:

If a show brought in 500,000 new subscribers who stayed for an average of 3 years at $10/month, that's $180 million in revenue from a $100 million investment. And that doesn't count keeping existing subscribers from churning.

Wall Street saw expenses. Netflix saw investments.

By 2015, the stock had recovered to new all-time highs around $100 (post-split). The company had 75 million subscribers worldwide.

By 2020, Netflix had 203 million subscribers and the stock was trading at $500+.

That's how it became a 100-bagger.

What We Can Learn From Netflix

So what can we learn from this journey? What are the signals to spot the next 100-bagger before it takes off?

Look for Business Model Innovations, Not Tech Innovations

Netflix wasn't primarily a technology company - it was a business model innovation. The monthly subscription with no late fees was revolutionary for movie rentals.

The next 100-bagger might not have breakthrough technology, but a business model that changes how value is created and captured in an industry.

Find Capital-Light Businesses That Can Scale

Netflix started with physical DVDs but built a digital platform that could scale without proportional increases in capital. Its cost structure became increasingly fixed rather than variable.

When revenue grows faster than costs for a sustained period, magic happens.

Look for Customer Obsession

From the beginning, Netflix optimized for customer experience, not short-term profits. No late fees. Great recommendations. Simple interface.

When customers love a product, they become evangelists. And the value of word-of-mouth marketing is incalculable.

Bet on Visionary Capital Allocators

Reed Hastings wasn't just a product visionary - he was a brilliant capital allocator. He knew when to invest ahead of the curve (streaming, international expansion, original content) even when Wall Street hated it.

The next 100-bagger will likely be led by someone who allocates capital with a 10-year view, not a quarterly view.

Expect Multiple Act Companies

Netflix had at least three major acts:

• DVD-by-mail

• Streaming distributor

• Original content producer

Companies that can pivot and evolve as markets change have the best chance of becoming 100-baggers.

Be Willing to Hold Through Crashes

Netflix dropped 80% after the Qwikster announcement. It dropped 38% in 2011 when it lost Starz content. It dropped 30%+ multiple times on subscriber growth misses.

If you sold on any of those drops, you missed the 100-bagger.

Look for Recurring Revenue

Netflix's subscription model meant predictable, recurring revenue. This creates a base of stability that allows for bold, long-term investments.

Companies with high-margin recurring revenue have built-in compounding machines.

Catching the Next 100-Bagger

The honest truth is that spotting the next 100-bagger is incredibly difficult. If it were easy, we'd all be billionaires.

But here's what we do know:

• It will probably be hiding in plain sight

• It will likely be misunderstood by most investors

• It will probably look expensive on traditional metrics

• It will suffer multiple 30%+ drawdowns on its journey

• It will have a business model that enables compounding

• It will be led by owner-operators with skin in the game

Remember, I'm not here to give you stock picks. I'm here to help you think differently about investing. To recognize patterns and characteristics that lead to exceptional returns.

The next Netflix might be something completely different. It might be in healthcare, fintech, education, or an industry that doesn't even exist yet.

But the principles remain the same.

Find businesses with scalable models, run by visionary capital allocators, with increasing returns to scale.

Buy them at reasonable prices.

And then do the hardest thing of all: Nothing.

Just hold on.

The biggest mistake investors make isn't buying the wrong stocks.

It's selling the right ones too soon.

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Thanks for reading,

Nico

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