NETFLIX DCF MODEL – 2022 Q2 | NETFLIX STOCK PRICE VS INTRINSIC VALUE.
In January 2022, I shared a complete analysis of Netflix following the 2021 annual results – You can see this analysis here.
Netflix recently released their 2022 Q2 results and management guidance and analysts’ projections have been updated.
In this post, I will take you through the adjusted DCF model for Netflix, considering the changes in assumptions and forecasts. We can then try to understand Netflix’s intrinsic value and see if Netflix is a good investment or not.
To build these discounted cash flow models, I use financial data exported from SharePad as well as the Netflix Investor Relations website. I also use Finbox and its models as a way of auditing my data, calculations, and my assumptions. If you want to learn more about these investor tools, see the reviews below:
Table of Contents
Netflix DCF Model
- Netflix DCF – Assumptions & Forecasts
- Netflix Discounted Cash Flow Forecast
- Netflix Internal Rate of Return
Netflix DCF Scenario Analysis
Netflix DCF Model
Netflix DCF – Assumptions & Forecast
Netflix DCF Assumptions
| Tax Rate | 12.0% |
| Discount Rate | 7.4% |
| Perpetual Growth Rate | 21.5% |
| EV/EBITDA Multiple | 13x |
| Transaction Date | 27/07/2022 |
| Fiscal Year-End | 31/12/2022 |
| Current Price | $222.18 |
| Shares Outstanding (m) | 444 |
| Debt (m) | $16,909 |
| Cash (m) | $5,819 |
The main changes to the assumptions since the previous Netflix DCF are as follows:
Revenue Forecast: Revenue forecasts have been lowered based on the updates in management guidance and analysts’ projects. Driven mainly by the current economic conditions and reduction in subscriber growth.
Discount Rate: The discount rate has been reduced predominantly due to the a change in the cost of capital in the WACC calculation.
EV/EBITDA Multiple: We use this as the exit multiple in the terminal value calculation. I have increased the EV/EBITDA multiple from 12x to 13x to better align with the market consensus.
Transaction Date: This has obviously changed as I have set the calculations to start from the date the model was created to ensure accurate cash flow calculations.
Share Price: Again, the current share price has been changed in the model to reflect the share price at the time of this analysis.
Debt & Cash: The latest debt and cash figures have been used from the 2022 Q2 earnings report.
CAPEX: Although not in the above assumptions, I have increased the CAPEX forecasts within the model due to cover the impacts of inflation.
Netflix Revenue Growth Forecast
As previously mentioned, the revenue growth forecasts have been reduced to align with the updates from management and the analysts’ projections. These forecasts are slightly lower than the analysts’ average and median forecasts.
For 2022, we have forecasted revenue growth to decline to 6.5%. This increases to 8% in 2023 followed by 9% in 2024. However, revenue growth then declines slightly to 8.5% n 2025 and 8% in 2026.
Netflix Unlevered Free Cash Flow Forecast – Base Case DCF Model
With these new assumptions and revenue growth forecasts, unlevered free cash flow reduces in 2022 to $4.8 billion. Unleverered FCF then rises to £6.7 billion in 2026.
Netflix Discounted Cash Flow Model – DCF
Discounted Cash Flow
The terminal value used in the model is an average of the EV/EBITDA exit and the growth exit.
Unlevered free cash flow is adjusted due to being part way through the year at the time of analysis, therefore can not claim access to the entire year’s cashflows.
The total adjusted Unlevered Free Cash Flow is the adjusted unlevered free cash with the addition of the terminal value in the final year. We can then use this to calculate the net present value.
Net Present Value (NPV)
If we add the present value of unlevered FCF to the present value of terminal value, we get a total net present value of almost $105 billion.
If we add cash and subtract debt, we end up with an equity value of $93.8 billion.
We can then divide the equity value by the shares outstanding to calculate the equity value per share. In this case, Netflix’s equity value per share or intrinsic value per share is $211.22.
Netflix Market Value vs Intrinsic Value
The market stock price, at the time of analysis, is $222.18. Therefore, with an intrinsic value of $211.22, we have a potential downside risk of -$10.96 or -4.9%.
Netflix Internal Rate of Return – IRR
Netflix Enterprise Value
The current market cap is $98.6 billion. This time we add debt and subtract cash to get an enterprise value of $109.7 billion.
Netflix IRR
The enterprise value can now be used as our initial investment amount. We can also bring across the unlevered free cash flows to see the total transaction/investment cash flows.
Using the IRR formula, we see Netflix has an IRR of 6.0% for our base case scenario.
Netflix Stock Price vs IRR
If the stock price increased by 20% to $266.62, the IRR would reduce to 1.8%. If the stock price dropped 20%, the IRR would increase to 11.3%.
Netflix Discounted Cash Flow Model – Scenario Analysis
The above DCF model was based on the base case scenario. Below is an overview of a bear case and bull case scenario to compare possible situations and the impact on intrinsic value.
Netflix DCF – Bear Case Scenario
Netflix Revenue Growth Forecast – Bear Case
For the bear case scenario, we have revenue growth reducing to 5.5% in 2022 and 2023. This then increases to 6% in 2024, 7% in 2025 and 8% in 2026.
Netflix Bear Case Free Cash Flow Forecast
The unlevered free cash flow forecast for the bear case scenario reduces in 2022 to $4.4 billion. Unlevered free cash flow then increases to $5.9 in 2026.
Netflix Intrinsic Value vs Market Value – Bear Case
At the time of analysis, the market value for Netflix is $222.18. The intrinsic value per share for the bear case scenario is $183.05, providing a potential downside of -$39.13 or -17.6%.
Netflix Internal Rate of Return – Bear Case
With a market price of $222.18, the bear case has an IRR of 2.8%. If the stock price increases by 20% to $266.62, the IRR is -1.3%. Alternatively, if the stock price dropped 20% to $177.74, the IRR would increase to 7.9%.
Netflix DCF – Bull Case Scenario
Netflix Revenue Growth Forecast – Bull Case
For the bull case, the revenue growth still reduces in 2022 but is slightly higher at 7%. This then increases to 10% and stays constant through to 2026.
Netflix Bull Case Free Cash Flow Forecast
The bull case scenario sees unlevered free cash flow forecast at $5 billion for 2022. This then increases to $8 billion by the end of 2026.
Netflix Intrinsic Value vs Market Value – Bull Case
The intrinsic value per share for the bull case is $252.828. That provides a potential upside of $30.64 or 13.8%
Netflix Internal Rate of Return – Bull Case
The IRR for the bull case is 10.3%. If the stock price increased by 20% to $266.62, the IRR would reduce to 5.9%. If the stock price decreased by 20% to $177.74, the IRR would increase to 15.8%.
I hope you have enjoyed this analysis. Keep a look out for other analysis and models, or subscribe below to be notified of new posts.
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I/we currently have no open positions in Netflix. I/we have no plans to open any new positions in Netflix over the coming weeks or months.
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