For Netflix, Red is the New Black

Netflix (NFLX) has fallen into the same trap as cable companies years ago.

With markets heavily saturated, its growth slowed to a relative standstill.

The latest quarterly results highlighted user growth up 1.75 million or 4%, a far cry from the millions it added every quarter when double-digit subscriber increases were common.

Management effectively acknowledged the inflection point when it rolled out advertising and began to crack down on password sharing.

Netflix search volume by financial pros has declined proportionally to its share price.

We see the recent surge as nothing more than a last hurrah and would caution against initiating a position here.

Netflix’s Business

Unless you’ve been living under a rock, you know who Netflix is and what they do.

So let’s skip the explanation about how they stream, charge subscription fees, and produce their own content.

The company recently created ad-supported subscriptions in an effort to boost sales, making it more like traditional cable networks.

Source: Netflix Investor Relations

Only about a third of U.S. households don’t subscribe or have access to Netflix, compared to 27% that didn’t have cable.

That’s held growth in check, with Asia-Pacific as the biggest untapped market.

Financials

Source: Stock Analysis

Up until the pandemic, Netflix pulled in revenues north of 20%. Interestingly, 2020 was the first time it saw sales slip below 27% since 2015.

Margins maxed out in 2021, when gross margins were at their highest, and have fallen since.

The company generated a huge amount of cash from operations, $3.23 billion in the last twelve months, with Capex limited to $349 million. However, the company has spent $632.9 million on acquisitions last year.

Currently, it holds $7.8 billion in cash on its balance sheet against $14.0 billion in long-term debt.

Valuation

Source: Seeking Alpha

Compared to its peers, Netflix isn’t ridiculously expensive.

For example, it trades at a lower P/E than Disney (DIS), but higher than Paramount Global (PARA).

Its price-to-sales is twice that of the closest competitor, but its price-to-cash flow isn’t as outrageous as PARA or Roku (ROKU).

Still, none of these are what we’d considered cheap.

Growth

Source: Seeking Alpha

While Netflix delivered outstanding revenue growth in the past, its forward look is one of the lowest amongst its peers.

Plus, it’s struggling on earnings with negative EBITDA growth YoY.

The only real plus is its free-cash-flow growth.

Profitability

Source: Seeking Alpha

Netflix runs a gross margin in line with its peers, though its EBIT, EBITDA, and net income margins are superior.

It also boasts the best return on equity, assets, and total capital of the group.

Our Opinion 4/10

Netflix is a mediocre value in an overpriced group.

The company’s growth is questionable, and we don’t see a pathway to either improve margins.

We think Bob Iger might have taken the right path with Disney, reducing its spend on streaming to focus on its core businesses.

That isn’t an option for Netflix, who we expect to struggle for several years.

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