Why Fin Pros are Betting Big on Netflix

Investors were wrong to write off Netflix (NFLX).

Many assumed the Covid-induced growth was over. 

The streaming giant already owned over half the U.S., U.K., and Australia markets.

After years of growth, total subscribers began to slip in 2022.

However, the business turned around in 2023, with total subscribers up 12.8%.

Unsurprisingly, search volume by financial pros jumped as the stock climbed +12% off its latest earnings release.

However, shares now trade at a premium, up almost 300% since the start of 2022.

With future growth a big question mark, everyone wants to know if this FANG stock has room to run.

Netflix’s Business

The O.G. of streaming, Netflix rolled a DVD mail rental business into a global content behemoth.

Starting with original programming like House of Cards and Orange is the New Black, Netflix went from an unknown to a virtual mainstay in every household.

Today, the company boasts more than 260 million subscribers across the globe.

An interesting fact: Netflix’s expansive digital library is accessible on any internet-connected device, making entertainment seamless and ubiquitous.

Revenues break down by region as follows:

• United States and Canada (55% of total revenues)
• Europe, Middle East, and Africa (20% of total revenues) 
• Latin America (15% of total revenues) 
• Asia-Pacific (10% of total revenues)

Netflix pioneered streaming content, forcing its peers to jump into the game, even at a loss.

For nearly a decade, Netflix’s revenue growth was unstoppable.

It wasn’t until they hit a saturation wall that sales growth slowed.

Management decided to implement controls around password sharing and a new and cheaper ad-sponsored plan while raising prices on its premium plan.

Financials

Source: Stock Analysis

Revenue growth stalled in 2022 after breakneck growth for nearly a decade.

While management believes there is more room to grow, it won’t be as robust.

However, the strategic shift and planning helped improve margins down the line.

Most importantly, free cash flow has blossomed to over 20%, or almost $7 billion per year.

With a total debt of $14.1 billion, Netflix has room to increase its Capex.

Valuation

Source: Seeking Alpha

Netflix’s jump in share price put it at a lofty valuation.

Trading at 34.0x forward earnings and 34.7x cash flow, it’s well above its peers.

Disney is the closest competitor, with a forward earnings multiple of 28.8x/

However, Disney only trades at 18.1x cash.

Growth

Source: Seeking Alpha

Once the poster child for growth, Netflix now leads the pack, with forward revenue gains of just 10.7%.

While that’s nearly double Disney’s, Warner Bros. Development (WBD) sees huge growth next year.

Nonetheless, Netflix has shown solid growth in its EPS and EBITDA.

Profitability

Source: Seeking Alpha

Comcast (CMSCA) may have the best gross margin. But Netflix stomps everyone in nearly every other way, save for EBITDA.

Plus, it’s the only company on this list to reach double-digit returns on equity, assets, and total capital.

Our Opinion 6/10

While Netflix is the undisputed king of streaming, we don’t see it as the growth engineer it once was.

That doesn’t mean there is plenty here.

The company generates $6 billion in free cash flow, or $13.86 per share.

With the stock up almost 300% in two years, we’d be more interested in a position around $400 or below.