Netflix Inc (NFLX, Financial) has seen a daily gain of 3.03% and a 3-month gain of 19.28%. With an Earnings Per Share (EPS) (EPS) of 9.39, the question arises: is the stock fairly valued? This article provides a comprehensive valuation analysis of Netflix (NFLX) to answer this question. Let's dive into the details.
About Netflix Inc (NFLX, Financial)
Netflix's primary business is a streaming video on demand service now available in almost every country worldwide except China. The firm primarily generates revenue from subscriptions to its eponymous service. Netflix delivers original and third-party digital video content to PCs, internet-connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. Netflix is the largest SVOD platform in the world with over 220 million subscribers globally.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. The GF Value Line on our summary page provides an overview of the fair value that the stock should ideally be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The stock of Netflix (NFLX, Financial) is estimated to be fairly valued based on GuruFocus' valuation method. GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $ 425.68 per share, Netflix stock is estimated to be fairly valued.
Because Netflix is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength of Netflix
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Netflix has a cash-to-debt ratio of 0.51, which is worse than 63.09% of 970 companies in the Media - Diversified industry. The overall financial strength of Netflix is 7 out of 10, which indicates that the financial strength of Netflix is fair.
Profitability and Growth of Netflix
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Netflix has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $32.10 billion and Earnings Per Share (EPS) of $9.39. Its operating margin of 17.51% is better than 86.97% of 1021 companies in the Media - Diversified industry. Overall, GuruFocus ranks Netflix's profitability as strong.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Netflix is 16.2%, which ranks better than 84.46% of 959 companies in the Media - Diversified industry. The 3-year average EBITDA growth is 19.2%, which ranks better than 70.48% of 769 companies in the Media - Diversified industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Netflix's ROIC is 11.09 while its WACC came in at 13.5.
Conclusion
Overall, Netflix (NFLX, Financial) stock is estimated to be fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 70.48% of 769 companies in the Media - Diversified industry. To learn more about Netflix stock, you can check out its 30-Year Financials here.
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