Has Netflix (NFLX) Growth Peaked?

Lockdowns were a boon to streaming services like Netflix (NFLX).

People stuck at home signed up for streaming at a blistering pace.

Today, Netflix is at THAT point…the point cable companies hit…the point of no growth.

It was a good run.

Now, everyone has a subscription.

The company’s latest earnings report painted a muddy portrait of the future.

While most folks were enamored with the company’s latest earnings report, according to our TrackStar data, financial pros were looking past the headlines.

Given the stock’s selloff, we assume they didn’t like what they found.

So, what does Netflix’s future hold?

Here’s what we see.

Netflix’s Business

Once a DVD rental company, Netflix grew to become the world’s largest streaming service under Reed Hastings’s leadership.

Today, the company boasts ~270 million subscribers across the globe.

And that’s sort of the problem.

It’s estimated that in the largest countries, Netflix holds the following penetration rates:

• Australia – 65%
• United Kingdom – 57%
• United States – 53%
• Canada – 48%
• Germany – 24%
• South Korea – 23%
• Brazil – 22%

Quite simply, it doesn’t have anywhere to go.

Sure, it’s not at the same level that the cable reached. But cable spent decades building up that business with no competition.

Nowadays, Netflix doesn’t just compete with streaming services, but short form video on social media as well.

Financials

Source: Stock Analysis

You might be tempted to dismiss this argument given the Q1 beat on earnings and revenue, with sales up 14.8% YoY.

However, that’s largely thanks to the crackdown on password sharing, which is more of a one-hit to the growth numbers. Although, it’s expected to add 13%-15% this year.

The good news is that the adjusted operating margins are expected to climb to 28% from 20.6% by 2026, greatly expanding the company’s profitability.

That would put operating cash flow around $2.2-$2.5 billion per quarter, with free cash flow expected to hit $6.0 billion in 2024, assuming content spending of $17.0 billion, which will likely be spent on share buybacks, yielding about 2.5%.

Total debt stands at $16.6 billion, which management plans to refinance as necessary or pay off to keep interest expenses in line.

Valuation

Source: Seeking Alpha

Netflix’s valuation is significantly higher than all its peers. But to be fair, it’s the only pure streaming play on this list.

The company’s stock is expensive, with a forward P/E ratio and price-to-cash-flow ratio of 30.7x and 35.7x, respectively.

For example, Disney (DIS) trades at 27.9x forward earnings and 18.6x forward cash. 

Growth

Source: Seeking Alpha

Normally, Netflix would garner the premium valuation from growth or profitability.

Yet, its revenue growth looking forward isn’t that stunning at just 11.0%, especially considering it’s built on password-sharing crackdowns.

And comparatively, Disney’s 3-year CAGR revenues are higher than Netflix’s.

Profitability

Source: Seeking Alpha

Now, Netflix does dominate when it comes to earnings power.

Its net income and free cash flow margins are excellent, and they are expected to improve nicely over the next few years as well.

Our Opinion 6/10

We don’t see much value in Netflix at this point in its lifecycle.

Its stock was certainly cheap a year or two ago.

However, the growth prospects are questionable, and with the company discontinuing reporting subscriber numbers next year, we see these as negative signs for the future.

We expect investors to be interested in the stock at around $500. That might not be a bad spot to dip your toes in provided you believe in the company’s margins forecast.

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