Stock (Symbol)

Netflix (NFLX)

Stock Price

$99

Sector

Technology

Data is as of

October 19, 2015

Expected to Report

Jan 18 – Jan 22

Company Description

Netflix, Inc. is a provider of Internet television network. The Company has over 57 million streaming members in over 50 countries. Its members can watch more than two billion hours of television (TV) shows and movies per month, including original series, documentaries and feature films on Internet-connected screen. The Company has three operating segments: Domestic streaming, International streaming and Domestic DVD. The Domestic and International streaming segments derive revenues from monthly membership fees for services consisting of streaming content. The Domestic DVD segment derives revenues from monthly membership fees for services consisting of DVD-by-mail. Its members can play, pause and resume watching, all without commercials or commitments. Additionally, in the United States, its members can receive DVDs to their homes. The Company offers streaming service both domestically and internationally. Source: Thomson Financial

Sharek’s Take

When I reviewed Netflix (NFLX) back in April I felt it could someday possibly be worth $750, or after accounting for the 7-for-1 split in July $107. That was my LONG term view of 5+ years and the stock got there in 5 months — whew. So let’s re-do the math and see what NFLX is worth now as well as what it can be worth long-term.

On the revenue side, Netflix makes around $100 per year per subscriber. Domestic streaming is $100 a year, Domestic DVDs by mail is $128 a year and International is $88 a year. On the expense side, the company’s biggest expense is cost of content. America has 60% cost of content now. International is 90% but could approach America in the long run. Canada is NFLX’s second market and has already gotten to America’s margin. So let’s assume 60% Cost of revenue. The other costs remain steady each qtr: 10% Marketing, 9% Technology and development, 5% General and administrative. Now let’s do the math:

One Year Chart

NFLX currently has 72 million subscribers (43 mill U.S. streaming, 5 mill DVD, 24 mill Intl streaming) earning it $7 billion in revenue a year.

$7 billion, Revenue
-4.2 billion, Cost of Revenue (60%)
-1.7 billion, Marketing (10%), Technology (9%), Admin (5%)
$1.1 billion Gross Profit or $800 million after taxes
$800 million/425 million shares outstanding = $1.90 in profits (EPS)

Netflix is a rapid grower, so a P/E of 65 is fair. 65 times $1.90 = $124 stock. NFLX is slightly undervalued.

Fair Value

Long term, the U.S. is nearing saturation of 50 million subscribers and International streaming could reach 100 million subscribers. Overall Netflix could have 150 million subscribers earning it $1.5 billion in revenue.

$15 billion, Revenue
-9 billion, Cost of Revenue (60%)
-3.6 billion, Marketing (10%), Technology (9%), Admin (5%)
$2.4 billion Gross Profit or $1.7 billion after taxes
$1.7 billion/425 million shares = $4 in profits

By then Netflix will be more mature, and the P/E will most likely be a lot lower. 30 times earnings of $4 is a $120 stock. 35x would be a $142 stock.

Bottom Line

My calculations show NFLX to be slightly undervalued at this time, but that the stock could be around this price 5+ years from now. Still, many things can change, such as NFLX raising prices or bringing more value to the table in the form of other entertainment (or technology). But in the end, the stock just went on a parabolic run and may need time to digest the gains. I feel this is a core holding for aggressive growth accounts, but I would wait for the stock to suffer a big correction before making a big investment.