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Netflix Inc (NASDAQ:NFLX) recently saw a daily gain of 2.8% and a 3-month gain of 11.02%. The company’s earnings per share (EPS) is 9.39, which begs the question: Is Netflix appropriately valued? In this article, we will do a complete valuation analysis to answer this question. We invite you to read on for a comprehensive examination of Netflix’s intrinsic value.
Company Overview
Netflix’s primary business is an on-demand video streaming service, which is now available in almost every country around the world except China. The company primarily generates revenue from subscriptions to its eponymous service. Netflix distributes original and third-party digital video content across a variety of digital platforms. Currently, Netflix is the world’s largest SVOD platform with over 220 million subscribers globally.
With a current stock price of $452.18 per share and a market cap of $200.40 billion, we compare these figures with GF Value, an estimate of fair value, to provide a comprehensive exploration of the company’s value.
Netflix’s Value Revealed: Is It Really Priced Right? a comprehensive guide
Understanding GF Value
GF Value represents the current intrinsic value of a stock derived from our exclusive methodology. The GF Value line on our Summary page provides an overview of the fair value at which the stock should be trading. It is calculated on the basis of three factors:
- Historical multiples (PE ratio, PS ratio, PB ratio and price-to-free-cash-flow) at which the stock has traded.
- GuruFocus adjustment factors based on the company’s past returns and growth.
- Prediction of future business performance.
We believe the GF Value Line is the appropriate value at which the stock should be trading. If the stock price is well above the GF value line, it is overvalued and is likely to have poor future returns. Conversely, if it is well below the GF value line, its future returns are likely to be higher.
According to GuruFocus value calculations, Netflix’s stock is considered fair value. This implies that its stock’s long-term return is likely to be close to the growth rate of its business.
Netflix’s Value Revealed: Is It Really Priced Right? a comprehensive guide
Link: These companies can give higher returns in future at lower risk.
financial strength
Investing in companies with low financial strength can result in permanent capital loss. Therefore, it is important to review the financial strength of a company before making a decision to buy shares. Looking at the cash-to-debt ratio and interest coverage can provide a good initial perspective on a company’s financial strength. Netflix’s cash-to-debt ratio is 0.51, which is worse than 62.81% of 1003 companies in the media-diverse industry. Based on this, GuruFocus ranks Netflix’s financial strength a 7 out of 10, suggesting a fair balance sheet.
Netflix’s Value Revealed: Is It Really Priced Right? a comprehensive guide
profitability and growth
Investing in profitable companies reduces risk, especially those that have demonstrated consistent profitability over a long period of time. Generally, a company with a higher profit margin provides better performance potential than a company with a lower profit margin. Netflix has been profitable for 10 consecutive years in the last 10 years. The company reported revenue of $32.10 billion and earnings per share (EPS) of $9.39 during the trailing 12 months. Its operating margin of 17.51% is better than 87.52% of 1018 companies in the Media-Miscellaneous industry. Overall, GuruFocus views Netflix’s profitability as strong.
Growth is probably the most important factor in valuing a company. GuruFocus research has found that growth is strongly correlated with the long-term performance of a company’s stock. The faster a company is growing, the more likely it is to create value for shareholders, especially if the growth is profitable. Netflix has a 3-year average annual revenue growth rate of 16.2%, which is better than 84.43% of 957 companies in the media-diverse industry. The 3-year average EBITDA growth rate is 19.2%, which is better than 70.44% of 768 companies in the Media-Diversified industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital invested in its business. The weighted average cost of capital (WACC) is the rate a company is expected to pay on average to all of its security holders to finance its assets. If the return on invested capital is greater than the weighted average cost of capital, then the company is probably creating value for its shareholders. For the trailing 12 months, Netflix’s ROIC is 11.09 while its WACC comes in at 13.51.
Netflix’s Value Revealed: Is It Really Priced Right? a comprehensive guide
conclusion
In conclusion, the stock of Netflix (NASDAQ:NFLX) is highly valued. The financial position of the company is sound and its profitability is strong. Its growth is better than 70.44% of 768 companies in the media-diversified industry. To learn more about Netflix stock, you can check out its 30-Year Financials here.
To locate high quality companies that deliver above average returns, please refer to the GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.
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