Netflix (NFLX) reappeared on Fortune’s World’s Most Admired Top 50 All-Stars list this month after a four-year absence. Responders to our survey, who are business insiders and C-suite executives, aren’t the only ones who have fallen in love, then out, then back in love. The company is in favor again because of a focus on innovation and stellar stock performance. An investor who purchased 100 shares 10 years ago would have seen his or her stake balloon from $2,200 to $73,000, with dividends reinvested.
Even over the past year the stock has given investors plenty to admire. Shares are up 63% from one year ago, though since December the stock price has fallen by a quarter, then jumped 19% from its February lows. In a day, shares can be up 5%, then down as much the next.
Why the volatility? “It is one of the more confusing equities on the planet to figure out,” says FBR Research analyst Barton Crockett. Investors struggle for a couple of reasons. First, Netflix is pioneering an entirely new business. “We have never seen anything like this: a global direct-to-consumer video service with completely original content that is separate from the traditional TV ecosystem,” Crockett says.
Netflix (No. 19, World’s Most Admired Companies) also has no direct publicly traded competitor for comparison. Amazon (AMZN) and Hulu have similar services, but both are owned by larger parents with other businesses that muddy the valuation.
Within Netflix, its two main businesses are at dramatically different points in their development, making it even more difficult to pin down its stock’s worth. With more than 45 million subscribers, its U.S. business is mature and, more important, has become very profitable, allowing Netflix to invest $5 billion to create 31 new series this year.
But its international unit, with about 30 million viewers, is still “deep in investment mode,” says Mark Mahaney, an analyst at RBC Capital. “Before they can generate $1, they have to spend money to get content to have a service that people would sign up for. By the nature of the beast, you have to invest upfront.”
It’s this business that has investors perplexed. Crockett says the U.S. streaming service is worth about $25 a share, or a little over a quarter of the company’s current stock price. That implies the remaining value, or roughly $75 a share, comes from the international business, which represents 30% of revenue, and is projected to grow 65% by the end of 2016.
It’s a leap of faith. According to a survey Mahaney conducted, in Japan, for example, only 1% of respondents said they had used the company’s services. That might sound like an opportunity, but a whopping 57% said they were “not at all likely” to pay for streaming content, almost three times as many as in the U.S.
Nevertheless, Mahaney is a firm believer, putting a $200 valuation on the stock, roughly twice its current price, in three to eight years. He points to Netflix penetration in markets like Germany and France that are “not necessarily known for being too U.S. culture-centric,” but where it has reached about 10% of viewers, a key hurdle to showing it has a “material presence in the market.”
Crockett also believes American entertainment is exportable. “People around the world may love or hate America, but by and large they tend to love American entertainment,” he says.
The trouble, he says, is that many of the grand expectations are already reflected in the stock price. Shares trade at nearly 83 times 2017’s projected earnings, and analysts are expecting profit to quadruple by next year. As he sees it, Netflix’s price won’t rise much unless it has another trick up its sleeve.
Still, it is hard to find an analyst who doesn’t see CEO Reed Hastings as a visionary. He “invented two companies,” Mahaney says. “DVD by mail and the business that killed DVD by mail.”
According to Crockett, he “will go down in history as one of the greatest entrepreneurs of all time. He is incredibly insightful, incredibly innovative, and has a remarkable ability to adapt.”
See the full list of Fortune’s Top 50 All-Stars and the World’s Most Admired Companies at fortune.com/wmac.
A version of this article appears in the April 1, 2016 issue of Fortune with the headline “What’s Next for Netflix?”.
