IS NETFLIX A GOOD INVESTMENT?

Is Netflix a good investment? What is Netflix fair value / intrinsic value? Is Netflix a buy at current valuations? These are the question we are trying to find out in the following fundamental analysis.

The data used in the below analysis and discounted cash flow model comes from a combination of SharePad, Finbox, and the Netflix investor relations website. Additionally, the dcf model uses personal assumptions which are shared below.

Table of Contents

Company Overview

• Company Introduction
• Shareholder Ownership

Fundamental Analysis

• Income Statement
• Balance Sheet
• Cash Flow Statement

Valuation Review

• Analysts Targets
• Comparable Analysis
• DCF – EBITDA Exit – Valuation & IRR
• DCF – EBITDA Exit – Sensitivity Analysis
• DCF – Perpetual Growth Rate – Valuation & IRR
• DCF – Perpetual Growth Rate – Sensitivity Analysis

Valuation Summary

• Valuation Football Field Chart

Company Overview

Netflix Fundamentals Introduction

Netflix Company Description

Netflix’s primary business is a streaming video-on-demand service now available in almost every country worldwide except China.

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.

In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

Netflix Valuations

Current Share Price ($m)	384.36	Revenue ($m)	29,698
Shares Outstanding	442.95	EBITDA ($m)	6403
Market Cap ($m)	170,252	EBITDA Margin	22%
Cash ($m)	6,055	EV/EBITDA	28
Total Debt ($m)	15,393	Debt / EBITDA	2.4
Enterprise Value ($m)	179,590	P/E	34

Netflix Revenue Breakdown – Region

Region	Revenue ($m)	%
United States	10,800	43.1%
Europe, Middle East, and Africa	7,772	31.0%
Latin America	3,157	12.6%
Asian-Pacific	2,372	9.5%
Canada	953	3.8%

Netflix Revenue Breakdown – Product

Product	Revenue ($m)	%
Streaming Revenue	24,757	99.0%
DVD Revenue	239	1.0%

Netflix Share Price History

Current Price:

384.39

52 WK Low:

359.70

52 WK High:

691.69

Netflix Shareholder Ownership

Shareholder	Holding ($m)	%
Capital Research and Management Company	57.50	13
Capital Group	49.50	11.2
Vanguard Group Inc	32.20	7.3
Capital Research Global Investors	29.20	6.6
BlackRock Inc	27.20	6.2
Fidelity Management & Research Company LLC	20.30	4.6
Capital Research & Mgmt Co – Division 3	19.70	4.6
FMR Inc	19.00	4.3
State Street Corporation	16.20	3.7
Capital World Investors	13.20	3.0
Vanguard Investments Australia Ltd	12.80	2.9
BlackRock Fund Advisors	9.24	2.1
T. Rowe Price Associates  Inc.	8.96	2.0
T. Rowe Price	8.52	1.9
State Street Global Advisors	8.35	1.9
Baillie Gifford & Co Limited.	7.99	1.8
Geode Capital Management  LLC	6.98	1.6
Invesco Capital Management LLC	6.94	1.6
Jennison Associates LLC	6.26	1.4
Magellan Asset Management Limited	5.84	1.3
Sands Capital Management  LLC	5.20	1.2
Northern Trust Corp	4.76	1.1
State Street Global Advisors (Aus) Ltd	4.52	1.0
Others	62.5	14.1

Netflix Fundamental Analysis

Netflix Income Statement

Netlfix Income Statement Waterfall – 2021

The most significant impact on profit is the cost of sales which for Netflix includes depreciation and amortisation of content as the main driver. However, the amortisation of content is less than the spending on content, therefore inflating income for the period.

5 Year View

Revenue has grown significantly from 11,693m to 29,698m. Net income margin also increased dramatically from 3.5% to 17.2%. EBITDA margin in proportion to net income from 7.8% to 21.6%.

Netflix 5 Year Income Statement

	2017A	2018A	2019A	2020A	2021A
Sales Revenue	11,693	15,794	20,156	24,996	29,698
Cost of Sales	(8,033)	(9,968)	(12,440)	(15,276)	(17,333)
Gross Profit	3,660	5,827	7,716	9,720	12,365
Operating Expenses	(2,821)	(4,222)	(5,112)	(5,134)	(6,171)
EBIT (Operating Income)	839	1,605	2,604	4,585	6,194
Interest	(353)	(379)	(542)	(1,386)	(354)
Income Before Taxes	485	1,226	2,062	3,200	5,840
Income Taxes	(74)	(15)	(195)	(438)	(724)
Net Income	412	1,211	1,867	2,762	5,116
EBITDA	911	1688	2708	4701	6403

Netflix Growth

Revenue growth has been declining over the last three years, with gross profit growth more or less static. Net income growth is higher vs three years ago, and EBITDA growth is lower.

Netflix Balance Sheet

Netflix Assets – Fiscal Year End 2021

Goodwill and Intangibles are predominantly made up of content assets.

Netflix Liabilities – Fiscal Year End 2021

Other Current and Other Non-Current Liabilities are primarily leasing of real estate and assets.

Netflix Equity – Fiscal Year End 2021

Netflix Balance Sheet – 5 Year View

Netflix Cash Flow Statement

Netflix Cash Flow From Operations – Fiscal Year End 2021

Other Operating Activities primarily consist of additions to content assets (new content), with depreciation expense being the depreciation of content assets (older content).

Netflix Cash From Financing – Fiscal Year End 2021

There was a positive share buy-back vs issuance of stock and positive debt repayments vs debt issued. However, this has contributed to the negative cash flow for the year.

Netflix Cash From Investing – Fiscal Year End 2021

Netflix acquisitions for 2021 include Roald Dahl Story Company (RDSC).

Netflix Cash Flow Statement – 5 Year View

2021 resulted in negative cash flow and a reduction in the cash balance. Lower cash from operation due to content expenses, lower cash from financing due to share buy-back and debt repayments, and lower cash from investing due to acquisitions contributed to the negative cash flow.

Netflix Valuation Review

Analysts View of Netflix

Netflix Price Target – Analysts’ Price Targets

Analyst Name	Firm	Position	Price Target	Action
Alan Gould	Loop Capital Markets	Buy	700.00	Reiterated
Andrew Beale	Arete Research	Buy	735.00	Initiated Coverage
Andrew Uerkwitz	Jefferies	Hold	415.00	Downgraded
Benjamin Swinburne	Morgan Stanley	Hold	450.00	Reiterated
Bryan Kraft	Deutsche Bank	Hold	465.00	Reiterated
Christophe Cherblanc	Societe Generale	Sell	340.00	Maintained
Daniel Salmon	BMO Capital	Buy	650.00	Reiterated
Doug Anmuth	J.P. Morgan	Buy	605.00	Maintained
Douglas Mitchelson	Credit Suisse	Hold	450.00	Downgraded
Eric Sheridan	Goldman Sachs	Hold	450.00	Maintained
Hamilton Faber	Atlantic Equities	Buy	780.00	Maintained
Jason Bazinet	Citigroup	Buy	450.00	Upgraded
Jed Kelly	Oppenheimer	Buy	530.00	Maintained
Jeffrey Wlodarczak	Pivotal Research	Buy	550.00	Maintained
John Blackledge	Cowen & Co.	Buy	600.00	Maintained
John Hodulik	UBS	Buy	575.00	Maintained
John Janedis	Wolfe Research	Buy	706.00	Maintained
Joseph Bonner	Argus Research	Buy	570.00	Maintained
Kannan Venkateshwar	Barclays	Hold	425.00	Downgraded
Maria Ripps	Canaccord Genuity	Buy	600.00	Maintained
Mark Mahaney	Evercore ISI	Hold	525.00	Downgraded
Mark Zgutowicz	Rosenblatt Securities	Hold	400.00	Reiterated
Matthew Thornton	Truist Financial	Hold	470.00	Downgraded
Michael Morris	Guggenheim	Buy	555.00	Maintained
Michael Nathanson	MoffettNathanson	Hold	460.00	Maintained
Michael Pachter	Wedbush	Sell	342.00	Reiterated
Nat Schindler	Bank of America Securities	Buy	750.00	Maintained
Scott Devitt	Stifel Nicolaus	Buy	500.00	Maintained
Steven Cahall	Wells Fargo	Buy	600.00	Reiterated
Thomas Champion	Piper Sandler	Buy	562.00	Maintained
Todd Juenger	Bernstein	Buy	617.00	Maintained
Unknown Analyst	CFRA	Buy	525.00	Maintained
Unknown Analyst	KGI Securities	Hold	605.00	Initiated Coverage
William Power	Robert W. Baird	Hold	420.00	Downgraded

Analysts’ targets range significantly from $340 to $780, with an overall average of £540.50. Most analysts have a buy or hold consensus, with a maintained or reiterated action. However, 18% of analysts have downgraded their views.

Analysts’ Consensus – Is Netflix a Buy?

Analysts’ Recent Actions for Netflix Stock

Netflix Comparable Analysis

Comparisons are made with companies in the streaming business.

Caution should be taken as some companies have business segments in other sectors that differ significantly from the streaming business.

Netflix Margin vs Competitors

Netflix is slightly above the average for gross margin and net margin and slightly below the EBITDA margin.

Netflix Liquidity vs Competitors

Netflix is lower than the average, with Roku having a particularly strong cash balance.

Netflix Solvency vs Competitors

Netflix has a below-average total debt to EBITDA but above average net debt to EBITDA. However, Roku skews the average with negative net debt due to its strong cash balance.

Netflix Returns vs Competitors

Netflix has slightly above-average returns. Apple has a significantly strong ROE

Netflix Dividend Yield vs Competitors

Netflix Dividend Payout Ratio vs Competitors

Netflix does not pay a dividend. Only Apple and Comcast currently pay a dividend. Others are either in growth mode or have suspended dividends to strengthen the balance sheet due to financial impacts from coronavirus.

Netflix PE – Price to Earnings vs Competitors

Netflix has a slightly lower P/E and forecast P/E than the average at 34.2 and 34.6. Roku, Disney and Amazon are considerably higher, and Discovery, Comcast and ITV are much lower.

Netflix Price to Sales vs Competitors

Netflix has a higher than average price to sales multiple. However, only Roku and Apple are higher.

Netflix Price to Free Cash Flow vs Competitors

Due to Netflix having negative cash flow in 2021, the price to FCF shows a comprehensively negative multiple. Although there is a positive FCF forecast for next year, the forecasted price to FCF is still much higher than the competitors.

Netflix EV/EBITDA vs Competitors

Roku and Disney have a much higher EV/EBITDA multiple than the others, impacting the average. On the other hand, Netflix, Amazon and Apple all have very similar EV/EBITDA multiples, with the others lower.

Is Netflix Good Value? – Comparable Valuation Multiples

Matric	Comps	EV	Net Debt	Equity Value	Shares	Share Price
EV/Revenue	4.7	213,365	8,665	204,699	443	462.08
EV/EBITDA	17.3	202,391	8,665	193,726	443	437.30
P/E	36.0	285,349	8,665	276,684	443	624.57
P/FCF	24.6	232,316	8,665	223,651	443	504.85

Using the comp averages, the valuations range from $437.30 to $624.57.

When creating the averages, certain outliers were removed as they significantly skewed the numbers.

Netflix DCF – EBITDA Exit – Valuation & IRR

Netflix DCF Assumptions

Tax Rate	15.0%
Discount Rate	10.3%
Perpetual Growth Rate	2.0%
EV/EBITDA Multiple	12.0x
Transaction Date	27/01/2022
Fiscal Year-End	31/12/2022
Current Price	381.43
Shares Outstanding	443
Debt	14,693
Cash	6,028
Capex	525

Netflix Cash Flow Forecast

To calculate unlevered free cash flow (FCFf), only depreciation and amortisation of PP&E (including intangibles) have been added back to EBITDA. The amortisation of content assets has not been added back due to exaggerating cash flows.

Netflix Terminal Value – EBITDA Exit

Final Forecast EBITDA	11,632
EV/EBITDA Multiple	12x
TERMINAL VALUE	139,580

Netflix Intrinsic Value – EBITDA Exit

Enterprise Value	113,441
Plus: Cash	6,028
Less: Debt	14,693
Equity Value	104,776
EQUITY VALUE / SHARE	236.51

Netflix Market Value vs Intrinsic Value – EBITDA Exit

Based on the model assumptions using the EBITDA Exit Multiple, the intrinsic value is $237, which is $145 lower than the current market value (at the time of analysis).

Market Value	381.43
Upside	-144.92
Intrinsic Value	236.51

Netflix Investment – Internal Rate of Return (IRR)

Target Price Upside	-38%
Internal Rate of Return (IRR)	-1%

Netflix Internal Rate of Return (IRR) vs Purchase Price

Netflix DCF – EBITDA Exit – Sensitivity Analysis

Variables’ Influence on Model

Changes to the cost of sales have the most significant impact on this model by a considerable margin. Next, changes to the EV/EBITDA multiple have the most impact, followed by the discount rate (WACC) and revenue.

The intrinsic value calculated from the model uses the assumptions: EBITDA Exit Multiple of 13x, WACC of 10.3% and final forecast EBITDA of $11,632. The tables to the right show the intrinsic value based on different assumption scenarios.

Impact on Intrinsic Value Price Per Share

Bear Case Price = $195 
Uplift vs Market Value = -49%

Bull Case Price   = $281 
Uplift vs Market Value = -26.3%

Bear Case Price = $209 
Uplift vs Market Value = -45%

Bull Case Price   = $268 
Uplift vs Market Value = -30%

Netflix DCF – Perpetual Growth Rate – Valuation & IRR

Netflix Assumptions

Tax Rate	15.0%
Discount Rate	10.3%
Perpetual Growth Rate	2.0%
EV/EBITDA Multiple	12.0x
Transaction Date	27/01/2022
Fiscal Year-End	31/12/2022
Current Price	381.43
Shares Outstanding	443
Debt	14,693
Cash	6,028
Capex	525

Netflix Cash Flow Forecast

To calculate unlevered free cash flow (FCFf), only depreciation and amortisation of PP&E (including intangibles) have been added back to EBITDA. The amortisation of content assets has not been added back due to exaggerating cash flows.

Netflix Terminal Value – Perpetual Growth

Final Forecast FCFf	9,084
Perpetual Growth Rate	2.0%
TERMINAL VALUE	111,269

Netflix Intrinsic Value – Perpetual Growth

Enterprise Value	95,576
Plus: Cash	6,028
Less: Debt	14,693
Equity Value	86,911
EQUITY VALUE / SHARE	196.19

Netflix Market Value vs Intrinsic Value – Perpetual Growth

Based on the model assumptions using the perpetual growth rate, the intrinsic value is $196, which is $185 lower than the current market value (at the time of analysis).

Market Value	381.43
Upside	-185.24
Intrinsic Value	196.19

Netflix Investment – Internal Rate of Return (IRR)

Target Price Upside	-49%
Internal Rate of Return (IRR)	-5%

Netflix Internal Rate of Return (IRR) vs Purchase Price

Based on the model assumptions and the current market share price of $381.43, there is an internal rate of return of -5%. If the stock price dropped 20% to $305, the IRR would still only be 0.2%.

Netflix DCF – Perpetual Growth Rate – Sensitivity Analysis

Variables’ Influence on Model

Changes to the cost of sales have the most significant impact on this model, followed by changes to the discount rate (WACC) and then FCF and revenue.

The perpetual growth rate shows less of an impact. However, this chart is based on relative % movements. Therefore, the perpetual growth rate could vary on a much larger scale than the other variables. For example, a change from 2% to 3% is a 50% increase, which you are less likely to see for the other variables.

The model assumptions show a Perpetual Growth Rate of 2%, WACC of 10.3% and a final forecast FCFf of $9,084. The tables to the right show the intrinsic value based on different assumption scenarios.  

Impact on Intrinsic Value Per Share

Bear Case Price = $178
Uplift vs Market Value = -53%

Bull Case Price   = $244
Uplift vs Market Value = -36%

Bear Case Price = $146
Uplift vs Market Value = 62%

Bull Case Price   = $281
Uplift vs Market Value = 26%

Netflix Valuation Summary

Netflix Value Valuation Football Field Chart

Is Netflix a good investment?

The historical trading range, analysts’ forecasts, and comparable valuations show that the recent pullback potentially provides a good entry point with a good upside.

However, the DCF models highlight the intrinsic value is significantly below the current market value. Therefore, a poor investment opportunity if you are looking for value. 

The high cost of creating content substantially impacts the cash flows, which is not apparent when simply looking at the income statement. This is due to the way Netflix amortise their content spend.

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Disclosure

I/we have no current positions in Netflix and do not intend to open any new positions in Netflix in the coming weeks.

This analysis has been written by a Bull Headed Bear analyst/author for Bull-Headed-Bear.com. I/we receive no compensation for this post other than any payments received from ads or affiliate links.