NETFLIX STOCK ANALYSIS - Overvalued Now? Intrinsic Valuation!

TL;DR

Netflix appears overvalued under the analysis because its estimated fair intrinsic value is below its market value, while membership and revenue growth are slowing. Netflix had 214 million paid members, but Q3 year-over-year membership growth was 9.4%, and the analyst projected roughly 10% annual membership growth over the next five years. Read on for the valuation method, growth catalysts, and major financial risks behind that conclusion.

Transcript

Hi everyone, this is Victor here, welcome to the Intelligent Investor Channel. Several members asked me to analyze Netflix stock to see if it’s great stock for the long term. Netflix stock did very well in the past 5 years. For example, it increased as much as +421.40% in the past 5 years. Obviously, past performance does not guarantee future resul... Read More

Key Insights

• 👨‍💼 Netflix's business model relies on monthly membership fees and has a global paid member base of 214 million.
• 🐢 The company's growth has been significant in the past, but future growth is expected to be slower as North American markets mature.
• 🤩 International membership expansion and a focus on original content and gaming are identified as key long-term growth catalysts.
• 😀 Netflix faces competition from various streaming services, and its success is tied to providing appealing content.
• ✋ The company has high content costs and a significant amount of debt, which pose financial risks.
• 😘 The fair intrinsic value of Netflix stock is estimated to be lower than its current market value.
• 🧚 Future growth in Netflix's fair intrinsic value is dependent on the continued addition of paid net members.

Questions & Answers

Q: Is Netflix stock overvalued based on its intrinsic valuation?

The analysis estimates that Netflix’s fair intrinsic value is lower than its current market value. Its future fair value depends heavily on continued growth in paid members, which the analyst expects to slow compared with the past.

Q: How does Netflix make money?

Netflix earns its revenue from monthly membership fees that provide access to original and licensed shows and movies. At the time of the analysis, the premium plan cost $18 per month in the US and $19 per month in Canada.

Q: How many paid Netflix members were there at the time of the analysis?

Netflix had 214 million global paid members when the analysis was made. The large membership base means investors should not expect revenue and net membership to grow as quickly as before.

Q: How quickly was Netflix’s membership expected to grow?

The analyst estimated that paid membership could grow by around 10% annually over the next five years. This projection was similar to the reported Q3 year-over-year membership growth of 9.4%.

Q: Why was Netflix’s growth slowing?

The pandemic accelerated membership gains in 2020 as more people stayed home and streamed entertainment, creating a pull-forward effect. By 2021, paid net membership growth was lower, while Q3 year-over-year revenue growth had slowed to 16.3%.

Q: What are Netflix’s main long-term growth catalysts?

The two identified catalysts are international membership expansion and a focus on original content and gaming. The analysis highlights membership opportunities outside North America, particularly in Asia Pacific and Europe, along with investment in content tailored to local markets.

Q: What are the major financial risks for Netflix?

Netflix faces high costs for original productions and third-party licensed content, and it had negative operating and free cash flow in 2018 and 2019. It also had $48 billion in content obligations, debt, and other obligations, compared with $7.5 billion in cash and $27.4 billion in total liabilities as of Q3.

Q: How is Netflix’s fair intrinsic value estimated in the analysis?

Because Netflix lacked consistent free-cash-flow growth, the analysis did not rely on traditional discounted-cash-flow or comparable-valuation models. Instead, it estimated an average market value per paid member and multiplied that figure by the total number of paid members.

Summary & Key Takeaways

• Netflix's business model is based on earning revenue from monthly membership fees, with a current global paid member base of 214 million.

• The company has seen rapid growth in the past but is expected to experience slower growth going forward, particularly in mature North American markets.

• Netflix's two long-term growth catalysts are international membership expansion, particularly in the Asia Pacific and European markets, and its focus on original content and gaming.