IS NETFLIX A GOOD INVESTMENT?

January 30, 2022 0 By bullheadedbear
Is Netflix a good stock to buy?

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

Fundamental Analysis

Valuation Review

Valuation Summary

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 ($m)384.36Revenue ($m)29,698
Shares Outstanding442.95EBITDA ($m)6403
Market Cap ($m)170,252EBITDA Margin22%
Cash ($m)6,055EV/EBITDA28
Total Debt ($m)15,393Debt / EBITDA2.4
Enterprise Value ($m)179,590P/E34
NFLX Valuations

Netflix Revenue Breakdown – Region

RegionRevenue ($m)%
United States10,80043.1%
Europe, Middle East, and Africa7,77231.0%
Latin America3,15712.6%
Asian-Pacific2,3729.5%
Canada9533.8%
NFLX Revenue by Region

Netflix Revenue Breakdown – Product

ProductRevenue ($m)%
Streaming Revenue24,75799.0%
DVD Revenue2391.0%
NFLX Revenue by Product

Netflix Share Price History

Current Price:384.3952 WK Low:359.7052 WK High:691.69
Netflix Share Price vs Index
NFLX Share Price vs Index
SharePad

Netflix Shareholder Ownership

ShareholderHolding ($m)%
Capital Research and Management Company57.5013
Capital Group49.5011.2
Vanguard Group Inc32.207.3
Capital Research Global Investors29.206.6
BlackRock Inc27.206.2
Fidelity Management & Research Company LLC20.304.6
Capital Research & Mgmt Co – Division 319.704.6
FMR Inc19.004.3
State Street Corporation16.203.7
Capital World Investors13.203.0
Vanguard Investments Australia Ltd12.802.9
BlackRock Fund Advisors9.242.1
T. Rowe Price Associates  Inc.8.962.0
T. Rowe Price8.521.9
State Street Global Advisors8.351.9
Baillie Gifford & Co Limited.7.991.8
Geode Capital Management  LLC6.981.6
Invesco Capital Management LLC6.941.6
Jennison Associates LLC6.261.4
Magellan Asset Management Limited5.841.3
Sands Capital Management  LLC5.201.2
Northern Trust Corp4.761.1
State Street Global Advisors (Aus) Ltd4.521.0
Others62.514.1
NFLX Major Shareholders
Netflix Major Shareholders

Netflix Fundamental Analysis

Netflix Income Statement

Netlfix Income Statement Waterfall – 2021

Netflix Income Statment Graph
NFLX Income Statement

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

Netflix Revenue, EBITDA Margin and Net Income Margin fo 2017 - 2021
NFLX Income Statement – 5 Year Progress

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

2017A2018A2019A2020A2021A
Sales Revenue11,69315,79420,15624,99629,698
Cost of Sales(8,033)(9,968)(12,440)(15,276)(17,333)
Gross Profit3,6605,8277,7169,72012,365
Operating Expenses(2,821)(4,222)(5,112)(5,134)(6,171)
EBIT (Operating Income)8391,6052,6044,5856,194
Interest(353)(379)(542)(1,386)(354)
Income Before Taxes4851,2262,0623,2005,840
Income Taxes(74)(15)(195)(438)(724)
Net Income4121,2111,8672,7625,116
EBITDA9111688270847016403
NFLX 5 Year Income Statement

Netflix Growth

Netflix margin growth
NFLX 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

Netflix Assets for Fiscal Year End 2021
NFLX Balance Sheet

Goodwill and Intangibles are predominantly made up of content assets.

Netflix Liabilities – Fiscal Year End 2021

Netflix Liabilities for fiscal year end 2021
NFLX Liabilities

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

Netflix Equity – Fiscal Year End 2021

Netflix equity for fiscal year end 2021
NFLX Equity

Netflix Balance Sheet – 5 Year View

Netflix Balance Sheet Progress - 2017 - 2021
NFLX Assets
SharePad

Netflix Cash Flow Statement

Netflix Cash Flow From Operations – Fiscal Year End 2021

Netflix Cash from Operations fiscal year-end 2021
NFLX Cash from Operations

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

Netflix Cash from financial fiscal year-end 2021
NFLX Cash from Financing

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 Cash from investing fiscal year-end 2021
NFLX Cash from Investing

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

Netflix Cash Flow Statement – 5 Year View

Netflix Cash Flow 5 year view
Netflix Cash Flow Statement

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 NameFirmPositionPrice TargetAction
Alan GouldLoop Capital MarketsBuy700.00Reiterated
Andrew BealeArete ResearchBuy735.00Initiated Coverage
Andrew UerkwitzJefferiesHold415.00Downgraded
Benjamin SwinburneMorgan StanleyHold450.00Reiterated
Bryan KraftDeutsche BankHold465.00Reiterated
Christophe CherblancSociete GeneraleSell340.00Maintained
Daniel SalmonBMO CapitalBuy650.00Reiterated
Doug AnmuthJ.P. MorganBuy605.00Maintained
Douglas MitchelsonCredit SuisseHold450.00Downgraded
Eric SheridanGoldman SachsHold450.00Maintained
Hamilton FaberAtlantic EquitiesBuy780.00Maintained
Jason BazinetCitigroupBuy450.00Upgraded
Jed KellyOppenheimerBuy530.00Maintained
Jeffrey WlodarczakPivotal ResearchBuy550.00Maintained
John BlackledgeCowen & Co.Buy600.00Maintained
John HodulikUBSBuy575.00Maintained
John JanedisWolfe ResearchBuy706.00Maintained
Joseph BonnerArgus ResearchBuy570.00Maintained
Kannan VenkateshwarBarclaysHold425.00Downgraded
Maria RippsCanaccord GenuityBuy600.00Maintained
Mark MahaneyEvercore ISIHold525.00Downgraded
Mark ZgutowiczRosenblatt SecuritiesHold400.00Reiterated
Matthew ThorntonTruist FinancialHold470.00Downgraded
Michael MorrisGuggenheimBuy555.00Maintained
Michael NathansonMoffettNathansonHold460.00Maintained
Michael PachterWedbushSell342.00Reiterated
Nat SchindlerBank of America SecuritiesBuy750.00Maintained
Scott DevittStifel NicolausBuy500.00Maintained
Steven CahallWells FargoBuy600.00Reiterated
Thomas ChampionPiper SandlerBuy562.00Maintained
Todd JuengerBernsteinBuy617.00Maintained
Unknown AnalystCFRABuy525.00Maintained
Unknown AnalystKGI SecuritiesHold605.00Initiated Coverage
William PowerRobert W. BairdHold420.00Downgraded
NFLX Analyst Targets & Consensus
Analysts price targets for Netflix
NFLX Analysts’ Price Targets Range

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 consensus for Netflix
NFLX Analysts Consensus

Analysts’ Recent Actions for Netflix Stock

Analysts recent actions for Netflix
NFLX Analysts Actions
SharePad

Netflix Comparable Analysis

Caution when comparing with other companies.

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 EBITDA margin, gross margin and net profit margin vs competitors
NFLX Margins 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 current ratio, quick ratio and cash ratio vs competitors
NFLX Liquidity vs Competitors

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

Netflix Solvency vs Competitors

Netflix Net debt to EBITDA and total debt to EBITDA vs competitors
NFLX 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 ROA, ROE and ROICE vs competitors
NFLX Returns vs Competitors

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

Netflix Dividend Yield vs Competitors

Netflix dividend vs competitors
NFLX Dividends vs Competitors

Netflix Dividend Payout Ratio vs Competitors

Netflix dividend payout ratio vs competitors
NFLX Dividend Payout 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 PE vs competitors
NFLX PE 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 price to sales vs competitors
NFLX 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

Netflix price to cash flow vs competitors
NFLX 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

Netflix EV/EBITDA vs competitors
NFLX 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

MatricCompsEVNet DebtEquity ValueSharesShare Price
  EV/Revenue4.7213,3658,665204,699443462.08
  EV/EBITDA17.3202,3918,665193,726443437.30
  P/E36.0285,3498,665276,684443624.57
  P/FCF24.6232,3168,665223,651443504.85
NFLX Comp Valuation Multiples
Netflix Comparable Analysis
NFLX Comp Valuation Multiple Range

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.

Finimize 50% off

Netflix DCF – EBITDA Exit – Valuation & IRR

Netflix DCF Assumptions

 Tax Rate15.0%
 Discount Rate10.3%
 Perpetual Growth Rate2.0%
 EV/EBITDA Multiple12.0x
 Transaction Date27/01/2022
 Fiscal Year-End31/12/2022
 Current Price381.43
 Shares Outstanding443
 Debt14,693
 Cash6,028
 Capex525
NFLX DCF Assumptions

Netflix Cash Flow Forecast

Netflix Cash Flow Forecast
NFLX 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 EBITDA11,632
EV/EBITDA Multiple12x
TERMINAL VALUE139,580
Netflix Terminal Value – EBITDA Exit

Netflix Intrinsic Value – EBITDA Exit

 Enterprise Value113,441
 Plus: Cash6,028
 Less: Debt14,693
 Equity Value104,776
EQUITY VALUE / SHARE236.51
Netflix Intrinsic Value – EBITDA Exit

Netflix Market Value vs Intrinsic Value – EBITDA Exit

Netflix Market Value vs Intrinsic Value
NFLX Market vs Intrinsic – 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 Value381.43
 Upside-144.92
 Intrinsic Value236.51
NFLX Upside

Netflix Investment – Internal Rate of Return (IRR)

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

Netflix Internal Rate of Return (IRR) vs Purchase Price

Netflix IRR vs Purchase Price
NFLX IRR vs Purchase Price
Finbox Get Started

Netflix DCF – EBITDA Exit – Sensitivity Analysis

Variables’ Influence on Model

Netflix DCF - EBITDA Exit - variables sensitivity
NFLX DCF Variables Influence

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

Netflix dcf sensitivity analysis - EV/EBITDA multiple
NFLX Sensitivity Analysis – EV/EBITDA

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

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

Netflix dcf sensitivity analysis - Ediscount factor
NFLX Sensitivity Analysis – Discount Factor

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

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

SharePad

Netflix DCF – Perpetual Growth Rate – Valuation & IRR

Netflix Assumptions

 Tax Rate15.0%
 Discount Rate10.3%
 Perpetual Growth Rate2.0%
 EV/EBITDA Multiple12.0x
 Transaction Date27/01/2022
 Fiscal Year-End31/12/2022
 Current Price381.43
 Shares Outstanding443
 Debt14,693
 Cash6,028
 Capex525
NFLX DCF Model Assumptions

Netflix Cash Flow Forecast

Netflix Cash Flow Forecast
NFLX 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 FCFf9,084
Perpetual Growth Rate2.0%
TERMINAL VALUE111,269
NFLX Terminal Value – Perpetual Growth

Netflix Intrinsic Value – Perpetual Growth

 Enterprise Value95,576
 Plus: Cash6,028
 Less: Debt14,693
 Equity Value86,911
EQUITY VALUE / SHARE196.19
NFLX Intrinsic Value – Perpetual Growth

Netflix Market Value vs Intrinsic Value – Perpetual Growth

Netflix intrinsic value vs market value using perpetual growth rates
NFLX Market vs Intrinsic – 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 Value381.43
 Upside-185.24
 Intrinsic Value196.19
NFLX Upside – Perpetual Growth

Netflix Investment – Internal Rate of Return (IRR)

 Target Price Upside-49%
 Internal Rate of Return (IRR)-5%
NFLX IRR – Perpetual Growth

Netflix Internal Rate of Return (IRR) vs Purchase Price

Netflix IRR vs Purchase price for perpetual growth rate DCF
NFLX IRR vs Purchase Price – Perpetual Growth

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

Netflix DCF - Perpetual growth rate - variables sensitivity
NFLX DCF Model Variables – Perpetual Growth

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

Netflix dcf sensitivity analysis - Perpetual growth rate
NFLX Sensitivity Analysis – Perpetual Growth

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

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

Netflix dcf sensitivity analysis - Discount Factor
NFLX Sisitivity Analsysis – WACC

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

Netflix Valuation Overview
NFLX Valuations Overview

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.