Should you buy Netflix stock?
Earning Overview
Netflix reported strong earnings in reason quarter, causing the stock to surge by 10%, bringing the company's market value to $418 billion. With $10 billion in cash and investments on its balance sheet and $13.8 billion in debt, its Enterprise Value sits at $422 billion. This marks another solid quarter for the streaming giant, with revenue increasing by 16% to $10.2 billion and total paid subscribers rising by 19 million—double what analysts had anticipated. Over the past 12 months, Netflix has generated $39 billion in revenue, $8.7 billion in net income, and $6.9 billion in free cash flow. This places the stock at a valuation of 11 times revenue, 48 times earnings, and 61 times free cash flow.
Free Cash Flow
Netflix's free cash flow (FCF) growth has been a key focus in recent years, as the company transitioned from heavy investments in content and global expansion to a more sustainable financial model. After years of negative free cash flow, Netflix has successfully turned the corner into positive territory, allowing the company to generate increasing amounts of free cash flow.
Here’s a breakdown of its recent trajectory:
Recent Free Cash Flow Trends: In 2023, Netflix generated $6.9 billion in free cash flow, continuing a positive trend after turning profitable in 2022. The company’s focus on tightening its budget for content, increasing subscription prices, and cracking down on password sharing helped fuel this growth.
Free Cash Flow Margin: Netflix’s free cash flow margin has steadily improved. For example, in 2023, it stood at around 18%, and the company expects to continue growing at this level in the near future. This means that a significant portion of its revenue is turning into free cash flow, a sign of strong operational efficiency.
Forecasting Future Growth: Analysts and Netflix itself project that the company will continue to grow free cash flow, with a target of achieving about $9 billion in free cash flow in 2024. If Netflix can sustain this momentum, its free cash flow could grow substantially over the next few years, especially as the company capitalizes on its global subscriber base and investment in high-profile content, such as sports.
Impact of Strategic Investments: Netflix has been strategically investing in new areas like live sports (e.g., the Jake Paul vs. Mike Tyson fight), ads, and future potential expansion into gaming, which could further diversify and increase its cash flow streams. However, while these initiatives could be lucrative, they also come with risk, particularly if Netflix is unable to secure key sports broadcasting deals or grow its ad business as planned.
Netflix’s performance underscores the strength of its product and capable management team. To accelerate growth in 2024, the company focused on cracking down on password sharing, raising prices, introducing ads, and investing in sports. The Jake Paul vs. Mike Tyson fight in December became the most streamed sporting event ever, and more than 60 million viewers tuned into Netflix's Christmas Day Super Bowl event. Netflix still has significant growth potential, particularly in sports, live events, and potentially even video games, though competition in these areas is fierce.
Netflix’s gross margin and operating margin both reached record highs of 46% and 27%, respectively, last year. However, the concern for investors lies in the company’s high valuation. At $418 billion, Netflix is valued at over 10 times its sales, more than double the size of Disney. Maintaining this valuation gap will require sustained growth and healthy profits for years. If Netflix grows its revenue by 15% annually for the next decade and operates with a free cash flow margin of 22%, it could generate around $200 billion in free cash flow—less than half its current market cap. Using a basic discounted cash flow model, the stock's fair value would be around $817 per share, implying a 14% downside from its current price.
That said, this isn’t a particularly pessimistic forecast, as Netflix's free cash flow margin is currently about 18%, and the company expects revenue growth of 12-14% this year. While Netflix is a high-quality business with strong management, the risk-reward scenario doesn’t seem as appealing at its current valuation. However, these are just my personal views and not financial advice, and I hold no position in Netflix stock.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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