The Netflix (NFLX) Dilemma: Hold or Fold?

Despite beating sales and earnings estimates, Netflix (NFLX) sold off ahead of Friday’s opening bell.

The company added more subscribers in the first half of 2024 than it did in any of the past two years by a wide margin, alleviating concerns they had reached market saturation.

So, why the selloff?

Free cash flow dropped YoY as management shoveled more money into content creation…$1.2 billion (vs. expected $1.6 billion ) from 2023’s $1.3 billion, and last quarter’s seasonally strong $2.1 billion.

That didn’t stop financial pros from taking a long, hard look at the stock, even amidst the broader market selloff, according to our TrackStar data.

Shares of the streaming giant are up almost 30% YTD. However, that’s also how much it’s up over the past year.

Many wonder whether the streaming giant’s once insatiable growth has come to an end.

Here’s what we think…

Netflix’s Business

Netflix pioneered the streaming revolution, transforming how the world consumes entertainment. 

And to think they were once just DVD rentals through the mail.

This global streaming giant offers a vast library of movies, TV shows, documentaries, and original content to over 277 million paid memberships across more than 190 countries.

Netflix produces and distributes an extensive array of original and licensed content, including television shows and movies. 

The company’s innovative recommendation algorithm tailors viewing suggestions to individual preferences, enhancing user experience and engagement. 

Netflix has also ventured into mobile gaming, offering a growing selection of games to subscribers at no additional cost.

Netflix segments its business into the following areas:

• UCAN (United States and Canada) (45% of total revenues) – Streaming services in the U.S. and Canada
• EMEA (Europe, Middle East, and Africa) (31% of total revenues) – Streaming services across Europe, Middle East, and Africa
• LATAM (Latin America) (13% of total revenues) – Streaming services in Latin American countries
• APAC (Asia-Pacific) (11% of total revenues) – Streaming services in Asia-Pacific regions

In its latest quarterly earnings, Netflix reported robust growth with revenue increasing 17% year-over-year to $9.56 billion. 

The company added 8.05 million new paid memberships globally, significantly surpassing analyst expectations. 

Netflix’s operating margin improved by nearly five percentage points to 27.2%, demonstrating the company’s ability to scale efficiently. 

The streaming giant is also making strides in its advertising business, with ad-supported membership growing 34% quarter-over-quarter.

Netflix continues to innovate, recently announcing plans to stream two NFL games on Christmas Day and securing exclusive rights for WWE programming starting in 2025. 

The company is also investing in its own ad tech platform, set to launch more broadly in 2025, aiming to enhance its advertising capabilities and revenue streams.

Financials

Source: Stock Analysis

Netflix’s breakneck sales growth slowed after the pandemic as the company saturated markets.

At the same time, the company faced increased pressure to increase cash flow.

So, management slowed content creation while adding in advertising subscriptions and increasing fees.

This didn’t go over well for the company initially, as new subscriber growth stopped in 2022. It wasn’t until Q2 2023 that things picked up again.

Management has shrunk long-term debt to $12.2 billion against $9.6 billion in cash on hand.

Last year, Netflix began to repurchase around $6 billion in stock, which it’s on track to do again this year, yielding around 2.2%.

Valuation

Source: Seeking Alpha

Netflix’s lofty valuation sits in stark contrast to the rest of the industry.

Only Disney’s (DIS) 32.0x is near Netflix’s at 33.5x forward earnings. 

But on price to cash flow, Netflix is all by itself.

However, there’s a reason for that…

Growth

Source: Seeking Alpha

Netflix has grown both in revenues and profits.

Other companies, such as Comcast (CMSCA) and Charter Communications (CHTR), are dying legacy stocks with little or negative growth.

Only Disney and Warner Brothers Development (WBD) show any meaningful sales growth.

Profitability

Source: Seeking Alpha

Netflix also has an enviable cost structure with excellent margins that dominate its peers, including net income and free cash flow.

This helped it achieve the highest returns on equity, assets, and total capital of the group.

Our Opinion 7/10

Netflix generates hefty amounts of cash and continues to grow sales.

The addition of advertising subscriptions, NFL games, and other non-capital-intensive content should help boost margins.

While we’d like to see the stock about 20% cheaper, there is some value at it’s current price.