In the face of a daily loss of -1.72%, a 3-month loss of -7.64% and Earnings Per Share (EPS) of 9.39, it's worth asking: is Netflix (NFLX, Financial) modestly undervalued? This article delves into the valuation analysis of Netflix, providing insights that could help investors make informed decisions. Stick around for an in-depth exploration.
Company Overview
Netflix Inc (NFLX, Financial) is a global streaming giant, offering video on demand services in almost every country except China. Its revenue primarily stems from subscriptions to its service. The platform delivers original and third-party digital video content to PCs, internet-connected TVs, and consumer electronic devices. With over 220 million subscribers globally, Netflix is the largest SVOD platform worldwide. As of September 14, 2023, the company's stock price is $405.14, while its GF Value stands at $451.78, suggesting that the stock could be modestly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated using three factors: historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the stock's fair trading value. 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's significantly below the GF Value Line, its future return will likely be higher.
Netflix's stock appears to be modestly undervalued according to GuruFocus Value calculation. With its current price of $405.14 per share and a market cap of $179.50 billion, Netflix's long-term return is likely to be higher than its business growth.
Netflix's Financial Strength
Investing in companies with low financial strength could lead to permanent capital loss. It's crucial to review a company's financial strength before deciding to buy shares. Netflix has a cash-to-debt ratio of 0.51, ranking worse than 62.44% of 1001 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 those with consistent profitability over the long term. 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 87.62% of 1018 companies in the Media - Diversified industry. Overall, GuruFocus ranks Netflix's profitability as strong.
Growth is an important factor in the valuation of a company. Netflix's 3-year average revenue growth rate is better than 84.31% of 956 companies in the Media - Diversified industry. Its 3-year average EBITDA growth rate is 19.2%, ranking better than 70.39% of 770 companies in the Media - Diversified industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) and the weighted cost of capital. The 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. Ideally, the return on invested capital should be higher than the weighted cost of capital. For the past 12 months, Netflix's ROIC is 11.09, and its WACC is 13.49.
Conclusion
In summary, Netflix (NFLX, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 70.39% of 770 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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