NFLX Stock Study (4-24-24)

I recently did a stock study on Netflix Inc. (NFLX, $577.75). Previous studies are here, here, here, and here.

M* writes:

     > Netflix’s relatively simple business model involves only one business,
     > its streaming service. It has the biggest television entertainment
     > subscriber base in both the US and the collective international
     > market, with almost 250 million subscribers globally. Netflix has
     > exposure to nearly the entire global population outside of China. The
     > firm has traditionally avoided live programming or sports content,
     > instead focusing on on-demand access to episodic television, movies,
     > and documentaries. The firm recently began introducing ad-supported
     > subscription plans, giving the firm exposure to the advertising
     > market in addition to the subscription fees that have historically
     > accounted for nearly all its revenue.

Over the past decade, this large-size company has grown sales and earnings at annualized rates of 24.1% and 59.9%, respectively. Lines are mostly up, narrowing, and parallel except for EPS declines in ’15 and ’22. PTPM lags peer and industry averages despite trending higher from 6.3% (’14) to 18.4% (’22) with a last-5-year mean of 15.5%.

Also over the past decade, ROE lags peer and industry averages despite trending up from 15.1% (’14) to 23.5% (’23) with a last-5-year mean of 26.0%. Debt-to-Capital is roughly even with peer and industry averages while increasing from 32.6% (’14) to 66.4% (’18) then reversing lower to 41.4% (’23) for a last-5-year mean of 51.5%.

Interest Coverage and Quick Ratio are 11.8 and 0.9, respectively. M* rates the company an “Exemplary” rating for Capital Allocation and “Narrow” for economic moat while Value Line gives an “A” rating for Financial Strength.

With regard to sales growth:

• YF projects YOY 7.6% and 12.2% for ’24 and ’25, respectively (based on 40 analysts).
• Zacks projects YOY 14.5% and 12.4% for ’24 and ’25, respectively (12 analysts).
• Value Line projects 8.9% growth per year from ’23-’28.
• CFRA projects 14.3% YOY and 13.1% per year for ’24 and ’23-’25, respectively.
• M* provides a 2-year ACE of 13.5% while projecting “upper single digits” annualized growth x5 years (analyst note).

I am forecasting below the range at 7.0% per year.

With regard to EPS growth:

• MarketWatch projects annualized ACE of 31.7% and 27.7% for ’23-’25 and ’23-’26, respectively (based on 52 analysts).
• Nasdaq.com projects 19.5% and 12.8% per year for ’24-’26 and ’24-’27 (12, 7, and 3 analysts for ’24, ’26, and ’27).
• Seeking Alpha projects 4-year annualized growth of 29.3%.
• YF projects YOY 42.1% and 21.2% for ’24 and ’25, respectively (42), along with 5-year annualized growth of 25.9%.
• Zacks projects YOY 48.5% and 21.6% for ’24 and ’25, respectively (12), along with 5-year annualized growth of 22.0%.
• Value Line projects annualized growth of 13.6% from ’23-’28.
• CFRA projects 54.2% YOY and 35.1% per year for ’24 and ’23-’25 along with a 3-year CAGR of 15.0%.
• M* gives a long-term annualized growth estimate of 23.3%.

I am forecasting just under the long-term-estimate range (mean of five: 22.8%) at 13.0% per year. I will use ’24 EPS of $12.03/share as the initial value rather than 2024 Q1 $14.41/share (annualized).

My Forecast High P/E is 35.0. Over the past decade, high P/E decreases from 113 (’14) to 41.6 (’23) with a last-5-year mean of 70.6 and a last-5-year-mean average P/E of 54.5. 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 30.0. Over the past decade, low P/E decreases from 69.3 (’14) to 23.7 (’23) with a last-5-year mean of 38.3. Again, at some point I expect P/E to fall back to earth and we may already be starting to see this with a current P/E of 40.1. I am forecasting toward the bottom of the range [only ’23 and ’22 (16.4) are lower].

My Low Stock Price Forecast (LSPF) is $360.90: default based on $9.39/share initial value. This is 37.5% less than the previous close and 12.6% less 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 6.1%.

PAR (using Forecast Average—not High—P/E) of 4.5% is less 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 (still lower than I seek for a large company).

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 146 studies (my study and 28 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 11.6%, 14.7%, 50.0, and 32.6. I am lower across the board. Value Line’s projected average annual P/E of 39.0 is lower than MS (41.3) and higher than mine (32.5).

MS high / low EPS are $24.20 / $11.82 versus my $22.16 / $12.03 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is $22.75. I am lowest of the three.

MS LSPF of $330.30 implies a Forecast Low P/E of 35.6: more than the above-stated 32.6. MS LSPF is 14.3% less than the default $11.82/share * 32.6 = $385.33, which results in more conservative zoning. MS LSPF is also 8.5% less than mine.

TAR (over 15.0% preferred) is much less than the 14.8% from MS. MOS seems robust in the current study.

With regard to valuation, PEG is 1.4 and 2.7 per Zacks and my projected P/E, respectively: the latter being significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is low at 0.74.

NFLX is a BUY under $464. With a forecast high price of $775.80, TAR should meet my 15% criterion around $388/share. I am not surprised to see a stock up 75% in the past 12 months far extended from a buy point.

Full disclosure: I currently own NFLX shares.