NFLX Stock Study (4-27-23)

I recently did a stock study on Netflix Inc. (NFLX) with a closing price of $321.15.

M* writes:

     > Netflix’s primary business is a streaming video on demand
     > service now available in almost every country worldwide
     > except China. The firm primarily generates revenue from
     > subscriptions to its eponymous service. Netflix delivers
     > original and third-party digital video content to PCs,
     > internet-connected TVs, and consumer electronic devices,
     > including tablets, video game consoles, Apple TV, Roku,
     > and Chromecast. Netflix is the largest SVOD platform in
     > the world with over 220 million subscribers globally

This large-size company has grown sales and earnings at annualized rates of 26.6% and 58.4%, respectively, over the last 10 years. Lines are mostly up and parallel except for EPS declines in ’15 and ’22. PTPM has trended higher from 3.9% in ’13 to 16.6% in ’22 with a last-5-year average of 13.4%. This trails peer and industry averages.

ROE, which slightly lags peers and the industry, has trended up from 9.2% to 21.6% over the last 10 years with a last-5-year average of 26.0%. Debt-to-Capital, which overall is higher than peers but lower than the industry, increased from 27.3% in ’13 to 66.4% in ’18 before declining to 40.9% in ’22. The last-5-year average is 56.5%, which is a bit higher than I would like to see. Interest Coverage and Quick Ratio were most recently 7.2 and 1.1, respectively. As of Q2 2022, the M* analyst says the company is in a “decent position” with $14.2B long-term debt and $7.8B cash. M* gives the company a Standard rating for Capital Allocation while Value Line gives an A for Financial Strength.

I forecast long-term annualized sales growth of 7% based on the following:

• CNN Business projects 7.3% YOY and 9.8% per year for ’23 and ’22-’24, respectively (based on 36 analysts).
• YF projects YOY 7.3% and 12.2% for ’23 and ’24, respectively (33 analysts).
• Zacks projects YOY 6.8% and 11.9% for ’23 and ’24, respectively (13).
• Value Line projects 9.9% growth per year from ’22-’27.
• CFRA projects 7.5% YOY and 10.2% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 9.9% while projecting 9.0% in its analyst note.

I am forecasting toward the low end of the range.

I forecast long-term annualized EPS growth of 13% based on the following:

• CNN Business projects 12.5% YOY and 20.0% per year for ’23 and ’22-’24, respectively (based on 36 analysts), along with 5-year annualized growth of 29.0%.
• MarketWatch projects annualized ACE of 18.1% and 21.0% for ’22-’24 and ’22-’25, respectively (45 analysts).
• Nasdaq.com projects 25.8% and 23.8% per year for ’23-’25 and ’23-’26 (14, 9, and 4 analysts for ’23, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 25.7%.
• YF projects YOY 11.4% and 28.6% for ’23 and ’24, respectively (32), along with 5-year annualized growth of 21.7%.
• Zacks projects YOY 11.8% and 29.7% for ’23 and ’24, respectively (14), along with 5-year annualized growth of 22.5%.
• Value Line projects annualized growth of 13.6% from ’22-’27.
• CFRA projects 14.6% YOY and 21.5% per year for ’23 and ’22-’24, along with a 3-year projected CAGR of 18%.
• M* gives a long-term annualized growth estimate of 17.4%.

I am forecasting just under the long-term-estimate range (mean of six: 21.7%).

My Forecast High P/E is 35. High P/E has decreased from 210 in ’13 to 61.3 in ’22 with a last-5-year average trending lower at 93.9. At some point, I expect P/E to fall back to earth. For now, I am forecasting at the upper end of my comfort zone.

My Forecast Low P/E is 23. Low P/E has decreased from 49.1 in ’13 to 16.4 in ’22 with a last-5-year average trending lower at 48.1. Again, at some point I expect P/E to fall back to earth and we may already be starting to see this. I am forecasting toward the bottom of the 10-year range (only ’22 is lower).

My Low Stock Price Forecast (LSPF) is the default value of $213.90. This is 33.4% less than the previous close but 31.5% greater than the 52-week low.

These inputs land NFLX in the HOLD zone with an U/D ratio of 2.6. The Total Annualized Return (TAR) is 13.3%.

PAR (using Forecast Average—not High—P/E) is 9.1%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 13.3% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 275 studies done in the past 90 days (71 outliers and my study excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 10.1%, 12.3%, 36.5, and 35.6 [interesting to see high and low P/E so close together]. I am lower on everything but EPS growth. Value Line projects a future average annual P/E of 33.0, which is lower than MS (36.1) and higher than me (29.0). I seem to have a decent MOS behind this study.

With regard to other data, MS high and low EPS are $17.69/share and $9.49/share compared to my $17.13 and $9.30. MS LSPF is $170.10 (20.5% higher than mine). This is less than half the default $9.49 * 35.6 = $340.69 and implies a Forecast Low P/E of 17.9. While this is quite the disconnect, it errs to the conservative side by decreasing the future stock price range thereby requiring a lower basis to invest. I find no fault with that.

I would look to invest under $310/share.