Over 100 million members in 190 countries enjoy streaming movies and TV shows on Netflix, ticker symbol: NFLX.
But the company that began as a DVD-by mail membership service had humble beginnings. In its early days it stood toe-to-toe with Blockbuster, the industry goliath, and won.
Walmart tried to knock Netflix off its pedestal, and lost. So too has Amazon competed with Netflix by offering streaming movies and TV shows as part of its Amazon Prime subscription service.
So, is Netflix here to stay for the long-term and a stock worth buying or will Amazon eat its lunch?
Table of Contents
Netflix Stock Price & Valuation
Before buying shares of Netflix, research the company quantitatively and qualitatively to understand not just its financial statements but also its competitive landscape.
When you want to make a buy or sell decision on a company, it is important to gather as much quantitative and qualitative information as possible.
Quantitatively, you want to know whether the company is adding subscribers, and growing revenues. More importantly, is Netflix able to convert revenues into profits?
As a company expands globally like Netflix has, revenues are generally reinvested to grow the company and acquire more customers.
But over time, it’s crucial that customers rebill and the customer lifetime value is long, so that margins and profits increase.
Quantitatively, we can apply the valuation models below to come up with an assessment of where the share price sits relative to theoretical models:
- P/E Multiples
- EBITDA Multiples
- 5 Year & 10 Year DCF Growth Exit
- 5 Year & 10 Year DCF EBITDA Exit
- 5 Year & 10 Year DCF Revenue Exit
- Earnings Power Value
Qualitatively, you want to know if competition is a big risk to Netflix. Will Amazon fall by the wayside like Walmart did? Or will it make a push to steal customers from Netflix?
Does Netflix have a moat that could protect it from a competitor conquering it? Typical moats that successful companies have include any one or a combination of the following:
- Network effects, such as the social network effect Facebook enjoys
- Low cost advantage e.g. Amazon or Walmart low prices
- High switching costs e.g. Salesforce.com customers’ data records are hard to switch
- Intangible assets e.g. Coca Cola’s brand
Netflix enjoys a low cost advantage. Its pricing is highly competitive, and to some extent, switching costs are high because the more customers view TV shows on the Netflix website, the more history they are unwilling to leave behind by moving elsewhere. Plus, there is a familiarity aspect to a platform – when customers get used to an interface and navigation console, they often stick with it out of comfort.
Netflix Stock Price History
The Netflix stock price history reveals a volatile stock which has the potential to rise and fall substantially over comparatively short time periods.
The one constant in the history of Netflix’s share price is that investors can get heartburn from the rollercoaster ride of ups and downs.
Netflix is famous for its double digit percentage price swings after quarterly earnings announcements.
That level of volatility is something you need to pay close attention to before diving in with both feet.
Looking at a 10 year stock chart, many heart-stopping declines and breathtaking share price ascents have taken place.
Even over any one year time period, the share price has its fair share of turbulence, especially when earnings are received negatively, as well as hair-raising climbs when results are positive.
>> MORE: Discover The Best Value Stocks
Netflix Revenues & Earnings
The growth of Netflix revenues is a key indicator that informs investors about the likely profitability of the company in the future. When revenue growth slows, profitability is likely to stabilize or slow too, and investors tend to apply lower multiples to these companies, which can hurt share price performance.
With its enormous growth globally in almost 200 countries, Netflix has seen a dramatic rise in revenues.
Total historical revenue growth has been exponential as Netflix onboarded customers in every geography it has entered.
But more important than revenues are earnings. How well can Netflix translate high revenue figures into high earnings?
Even if it can’t do so right away because it reinvests its revenues into expansion opportunities, customer acquisition and marketing, will it do so in the future?
To glean those insights, we can peer into the future and see what the expectations are for future earnings growth.
In percentage terms, you can see future earnings for Netflix are expected to skyrocket over the next decade.
Netflix P/E Ratio
The Netflix price-to-earnings ratio (p/e ratio) is a valuation metric that contrasts the current price of Netflix to its per-share earnings. It is frequently labeled the price multiple or earnings multiple.
In its quest to build revenues and take a stranglehold on the streaming movies services business, Netflix sacrificed earnings.
For most of its operating history, earnings were secondary to revenue growth and that is reflected in its P/E multiple.
Conventional fundamental analysis would suggest caution is warranted when p/e multiples are high.
But it’s not entirely unusual or unprecedented when a company has a global opportunity that its earnings are suppressed for years, even decades.
Amazon was historically the poster child for a company with very low earnings yet a share price that relentlessly climbed as it became obvious that it was establishing a dominant market position that could not easily be disrupted by rivals.
>> Related: Find Stocks To Buy Now
Netflix Return On Invested Capital (ROIC)
The Netflix ROIC figure measures the profitability and value-creating potential of the company after taking into consideration the amount of capital invested.
The big question investors need to answer is how well Netflix can convert revenues into earnings and how good a job it does creating value.
Return on invested capital, or ROIC, gauges the return that an investment generates for stakeholders, both shareholders and bondholders.
To date, Netflix has a so-so ROIC, which is to be expected. But over time, it needs to keep stakeholders happy by ensuring they earn the returns they expect.
>> Related: What Are The Best Stocks To Buy?
Netflix Debt To Total Capital
When debt levels are high, interest payments can eat into profit margins. For Netflix, debt has historically been minimal.
For some companies, taking on debt is a necessary financial strategy to finance projects and growth. But excessive debt levels can suffocate a company over time, especially when a Fed rate hike affects variable loans.
Debt to total capital ratios below 10% are within the normal range and historically Netflix has had a low ratio that would suggest excessive debt is not a concern.
How much does it cost a company to raise capital from shareholders and bondholders?
Does the company generate a return that keeps shareholders happy?
Do bondholders earn a yield that satisfies them?
These are the questions that the WACC, or weighted average cost of capital, calculates.
The overall return required by stakeholders is engrained in the Netflix WACC.
Consider as an example a company needing $1,000,000 to operate which receives a loan of $500,000 from lenders and accepts $500,000 from shareholders.
If lenders demanded a 3% return and shareholders expected a 9% return, then the WACC would be 6%, meaning that is the return the company would need to produce to keep both equity and debt holders satisfied.
For Netflix, the weighted average cost of capital is shown below:
Below you can see an example of Netflix financials and a 5 year DCF Revenue Exit model:
The author has no position in any stocks mentioned. Investormint does not own or recommend any stocks.
Have you traded Netflix? What investing lessons have you learned? We would love to hear from you.