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Analysis of Netflix Inc

Analysis of Netflix Inc

10 March 2022

Netflix is a subscription streaming service. It allows subscribers to watch shows, movies and TV series without ads. Netflix has 222 million subscribers in 190 countries around the world. This is the largest video service in the world. Amazon Prime is second with 175 million subscribers, and Disney Plus is third with 130 million. For comparison, YouTube Premium has about 30 million subscribers. Netflix started producing its own content in 2013.

Netflix is headquartered in California, it was founded in 1997.

The first look at finance is not inspiring: over the past 4 years, there has been a positive free cash flow only once, in 2020, when everyone was sitting at home because of COVID-19. Net profit has grown more than 4 times since 2019, revenue has almost doubled, and it is growing evenly every year. Operating profit also increased almost 4 times. The company spends 2.5 billion on marketing annually. The gross profit is 42%, the same as the industry average, but the net margin is 17%, which is great, since most companies in the industry are generally unprofitable.

P/E 34, forward P/E 35 (current average for competitors 32)
P/B 10.9 (industry average 6.5)
P/S 5.8 (industry average 3.9)
Debt of $18 billion with current operating cash flow of $392 million
No dividends
Stock Price: $358

The cash flow discounting model shows a fair price of $347.
Simply Wall Street estimates the company at $754.
28 analysts leading the company give an average estimate of $512.

Netflix has quite a lot of debt, but this is not surprising — they spend $17 billion a year on content creation. It’s just that when a company has such a size, it manages to re-credit or receive revenue to cover debts.

Technical picture:
Stocks are trading below the 20, 50 and 200 day moving averages. Recovery to the area of 380-400 is possible in the near future, and the 200-day average is now located at $544. However, if the stock continues to fall, averaging high multipliers, this will be a signal to increase the position.

Conclusion: Netflix lacks efficiency in the financial part. The debt is not fully covered by the operating cash flow, and the net profit, let’s say, is slightly embellished by accountants due to non-monetary income items. However, this company is in the TOP 3 of its industry (entertainment) and if they adjust the work of the finance department a little, the stock will be overvalued. Even with such management, it cost $691 last November. The situation here is very similar with Salesforce, a major growing player, without dividends, on a decline in the value of shares. However, Netflix’s financial multipliers are worse in their industry than Salesforce’s in its.

Therefore, the current prices are interesting to buy, here you also need to buy and forget for 3-5 years. Even if the management does not become better, the stock may at some point double, as it already did in November last year and it can be sold.

10 March 2022
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