NFLX Stock Study (7-25-23)

I recently did a stock study on Netflix Inc. (NFLX) with a closing price of $428.37. Previous studies are here and here.

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.

Over the past decade, this large-size company has grown sales and earnings at annualized rates of 26.6% and 58.4%, respectively. Lines are mostly up and parallel except for EPS declines in ’15 and ’22. PTPM lags peer and industry averages despite trending higher from 3.9% in ’13 to 16.6% in ’22 with a last-5-year mean of 13.4%.

Also over the past decade, ROE lags peer and industry averages while trending up from 9.2% in ’13 to 21.6% in ’22 with a last-5-year mean of 26.0%. Debt-to-Capital, which overall is higher than peers and lower than the industry, increases from 27.3% in ’13 to 66.4% in ’18 before declining to 40.9% in ’22 for a last-5-year mean of 56.5%.

Interest Coverage and Quick Ratio are 7.5 and 1.1, respectively. M* gives the company a “Standard” rating for Capital Allocation while Value Line gives an A for Financial Strength.

With regard to sales growth:

• CNN Business projects 7.3% YOY and 10.2% per year for ’23 and ’22-’24, respectively (based on 35 analysts).
• YF projects YOY 4.1% contraction and 13.3% growth for ’23 and ’24, respectively (35 analysts).
• Zacks projects YOY growth of 6.6% and 13.9% for ’23 and ’24, respectively (12).
• Value Line projects 9.9% growth per year from ’22-’27.
• CFRA projects growth of 7.5% YOY and 10.2% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 9.8% growth while projecting 7.0% in its analyst note.

I am forecasting toward the low end of the range at 7.0% per year.

With regard to EPS growth:

• CNN Business projects 16.0% YOY and 23.0% per year for ’23 and ’22-’24, respectively (based on 35 analysts), along with 5-year annualized growth of 29.5%.
• MarketWatch projects annualized ACE of 22.2% and 23.5% for ’22-’24 and ’22-’25, respectively (44 analysts).
• Nasdaq.com projects 25.7% and 22.0% per year for ’23-’25 and ’23-’26 (13, 9, and 4 analysts for ’23, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 25.9%.
• YF projects YOY 6.3% and 29.2% for ’23 and ’24, respectively (36), along with 5-year annualized growth of 21.6%.
• Zacks projects YOY 19.2% and 31.4% for ’23 and ’24, respectively (13), along with 5-year annualized growth of 24.3%.
• Value Line projects annualized growth of 13.6% from ’22-’27.
• CFRA projects 19.1% YOY and 22.8% per year for ’23 and ’22-’24, along with a 3-year CAGR of 23.0%.
• M* gives a long-term annualized growth estimate of 17.9%.

I am forecasting just under the long-term-estimate range (mean of six: 22.1%) at 13.0%. I will use 2023 Q2 EPS of $9.39/share (annualized) as the initial value rather than ’22 EPS of $9.95.

My Forecast High P/E is 35.0. Over the past decade, high P/E has decreased from 211 in ’13 to 61.3 in ’22 with a last-5-year mean trending lower at 93.9. The last-5-year-mean average P/E is 71.0. 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 25.0. Over the past decade, low P/E has decreased from 49.1 in ’13 to 16.4 in ’22 with a last-5-year mean 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) of $234.80 is the default based on $9.39/share initial value. This is 45.2% less than the previous close but 11.0% greater than the 52-week low.

These inputs land NFLX in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 7.2%.

PAR (using Forecast Average—not High—P/E) is 3.9%, which is lower than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 188 studies done in the past 90 days (54 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 10.3%, 13.1%, 50.0, and 30.0. I am lower across the board. Value Line projects a future average annual P/E of 38.0, which is lower than MS (40.0) and higher than me (30.0).

MS high/low EPS is $17.53/$9.35 vs. my $17.30/$9.39 (per share). These numbers are in very close agreement, which I actually find quite interesting. My EPS growth rate is over 900 basis points less than the mean. With regard to the two most popular sources Value Line (high EPS $18.85) and M* (high EPS $22.67), I am 60 and 490 basis points less, respectively. For these reasons, I would have expected the difference between high EPS to be larger.

MS LSPF of $232.50 implies a Forecast Low P/E of 24.9 vs. the above-stated 30.0. MS LSPF is 17.1% less than the default value of $9.35/share * 30.0 = $280.50, which results in more conservative zoning. MS LSPF is also 1.0% less than mine.

Mainly due to the lower P/E range, MOS in the current study seems robust.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two metrics I have been monitoring. PEG is 3.1 (1.5) based on my (Zacks) EPS growth rate while Relative Value is 0.64 per M*. The former (latter) suggests the stock to be overvalued (undervalued).

According to Kim Butcher’s “quick and dirty DCF,” the stock should be priced at 12 * [$57.00 – ($0.00 + $1.25)] = $669.00 (i.e. stock undervalued by 36.0%).

The current study finds NFLX to be far above the BUY zone because as mentioned above, I expect the P/E range to eventually normalize resulting in a lower [forecast] stock price [range]. I would look to re-evaluate NFLX under $327/share.