Netflix Inc (NFLX, Financial) has recently seen a daily gain of 2.8% and a 3-month gain of 11.02%. The company's Earnings Per Share (EPS) stand at 9.39, raising the question: Is Netflix fairly valued? In this article, we will conduct a thorough valuation analysis to answer this question. We invite you to read on for a comprehensive examination of Netflix's intrinsic value.
Company Overview
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 a variety of digital platforms. As of now, Netflix is the largest SVOD platform in the world with over 220 million subscribers globally.
With a current stock price of $452.18 per share and a market cap of $200.40 billion, we compare these figures with the GF Value, an estimation of fair value, to provide a comprehensive exploration of the company's value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page provides an overview of the fair value that the stock should 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.
We believe the GF Value Line is the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus Value calculation, the stock of Netflix is believed to be fairly valued. This implies that 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
Investing in companies with low financial strength could result in permanent capital loss. Hence, it is crucial to review a company's financial strength before deciding to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Netflix has a cash-to-debt ratio of 0.51, which ranks worse than 62.81% of 1003 companies in the Media - Diversified industry. Based on this, GuruFocus ranks Netflix's financial strength as 7 out of 10, suggesting a fair balance sheet.
Profitability and Growth
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 87.52% of 1018 companies in the Media - Diversified industry. Overall, GuruFocus ranks Netflix's profitability as strong.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Netflix is 16.2%, which ranks better than 84.43% of 957 companies in the Media - Diversified industry. The 3-year average EBITDA growth rate is 19.2%, which ranks better than 70.44% of 768 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 13.51.
Conclusion
In conclusion, the stock of Netflix (NFLX, Financial) is believed to be fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 70.44% of 768 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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