NETFLIX DCF MODEL – 2022 Q2 | NETFLIX STOCK PRICE VS INTRINSIC VALUE.

August 4, 2022 1 By bullheadedbear
Is Netflix a buy?
Is Netflix a good investment?

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:

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Table of Contents

Netflix DCF Model

Netflix DCF Scenario Analysis

Netflix DCF Model

Netflix DCF – Assumptions & Forecast

Netflix DCF Assumptions

 Tax Rate12.0%
 Discount Rate7.4%
 Perpetual Growth Rate21.5%
 EV/EBITDA Multiple13x
 Transaction Date27/07/2022
 Fiscal Year-End31/12/2022
 Current Price$222.18
 Shares Outstanding (m)444
 Debt (m)$16,909
 Cash (m)$5,819
NFLX DCF Assumptions

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

NFLX Revenue Forecast - Base Case (2022-Q2)
NFLX Revenue Forecast – Base Case (2022-Q2)

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

NFLX Unlevered FCF Forecast - Base Case
NFLX Unlevered FCF Forecast – Base Case

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

NFLX Terminal Value - Base Case
NFLX Terminal Value – Base Case

The terminal value used in the model is an average of the EV/EBITDA exit and the growth exit.

NFLX Total Adjusted Unlevered FCF - Base Case
NFLX Total Adjusted Unlevered FCF – Base Case

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)

NFLX Net Present Value - Base Case
NFLX Net Present Value – Base Case

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

NFLX Market Value vs Intrinsic Value
NFLX 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

NFLX Enterprise Value
NFLX 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

NFLX IRR Calculation
NFLX IRR Calculation

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

NFLX Stock Price vs IRR
NFLX 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

NFLX Bear Case Revenue Forecast
NFLX Bear Case Revenue Forecast

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

NFLX Bear Case - Unlevered Free Cash Flow Forecast
NFLX Bear Case – Unlevered 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

NFLX Intrinsic Value vs Market Value - Bear Case
NFLX 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

NFLX IRR -  Bear Case
NFLX IRR – 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

NFLX Revenue Forecast - Bull Case
NFLX Revenue 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

NFLX Unlevered Free Cash Flow Forecast- Bull Case
NFLX Unlevered Free Cash Flow Forecast- Bull Case

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

NFLX Intrinsic Value vs Market Value - Bull Case
NFLX 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

NFLX IRR -  Bull Case
NFLX IRR – 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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