A Look At The Fair Value Of Netflix

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A Look At The Fair Value Of Netflix

Simply Wall St.01-02 21:25

Key InsightsThe projected fair value for Netflix is US$922 based on 2 Stage Free Cash Flow to EquityCurrent share price of US$891 suggests Netflix is potentially trading close to its fair valueOur ...

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Current share price of US$891 suggests Netflix is potentially trading close to its fair value. Our fair value estimate is 9.5% higher than Netflix's analyst price target of US$842. In this article we are going to estimate the intrinsic value of Netflix, Inc.  by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow  model. Believe it or not, it's not too difficult to follow, as you'll see from our example!Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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(NASDAQ:NFLX) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.Check out our latest analysis for NetflixIs Netflix Fairly Valued?We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:10-year free cash flow (FCF) estimate2025202620272028202920302031203220332034Levered FCF ($, Millions)US$8.96bUS$10.7bUS$12.9bUS$15.0bUS$18.0bUS$20.2bUS$22.1bUS$23.7bUS$25.1bUS$26.4bGrowth Rate Estimate SourceAnalyst x22Analyst x20Analyst x9Analyst x6Analyst x3Est @ 12.41%Est @ 9.47%Est @ 7.42%Est @ 5.98%Est @ 4.97%Present Value ($, Millions) Discounted @ 7.4%US$8.3kUS$9.3kUS$10.4kUS$11.3kUS$12.6kUS$13.1kUS$13.4kUS$13.4kUS$13.2kUS$12.9k(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$118bThe second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.4%.Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$26b× (1 + 2.6%) ÷ (7.4%– 2.6%) = US$565bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= US$565b÷ ( 1 + 7.4%)10= US$276bThe total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$394b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$891, the company appears about fair value at a 3.3% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. NasdaqGS:NFLX Discounted Cash Flow January 2nd 2025Important AssumptionsThe calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Netflix as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.4%, which is based on a levered beta of 1.164. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.SWOT Analysis for NetflixStrengthEarnings growth over the past year exceeded the industry.Debt is not viewed as a risk. Balance sheet summary for NFLX.WeaknessNo major weaknesses identified for NFLX.OpportunityAnnual earnings are forecast to grow faster than the American market.Current share price is below our estimate of fair value.ThreatRevenue is forecast to grow slower than 20% per year. What else are analysts forecasting for NFLX?Looking Ahead:Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to \"what assumptions need to be true for this stock to be under/overvalued?\" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Netflix, we've put together three further items you should look at:Financial Health: Does NFLX have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.Future Earnings: How does NFLX's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.","kind":"highlight","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}