Stock (Symbol)

Netflix (NFLX)

Stock Price

$92

Sector

Technology

Data is as of

July 28, 2016

Expected to Report

Oct 12 – 17

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

Netflix (NFLX) dropped after it reported net subscriber growth slowed last qtr. The company added 1.7 new subscribers, well short of the 2.5 million analysts expected. The cause of the shortfall was higher churn caused by raising prices of long-time subscribers, who were paying less than the going rate. Last qtr I felt NFLX would have 100 million subs by the end of 2016, now it might short of that mark. Here’s my napkin analysis on NFLX’s cash flow, assuming International profit margins will someday match those of the US:

$10 billion, Annual Revenue
-6 billion, Cost of Revenue (60%)
-2.1 billion, Marketing (7%), Technology (9%), Admin (5%)
$1.9 billion Gross Profit or $1.38 billion after taxes
$1.38 billion/425 million shares outstanding = $3.25 in profits (EPS)

A 35 P/E x $3.25 in profits equates to a $96 stock price, thus NFLX where it should be. Long-term 150 subscribers is achievable, which is $4.80 in est profits and a $168 Fair Value.

One Year Chart

Although NFLX dropped after the disappointing subscriber numbers, it’s bounced back a bit since. The P/E is high because the company isn’t getting good profit margins Internationally yet, thus profits suffer. Last qtr NFLX had a 9 cent profit, and beat the street by 7 cents. Profit estimates for the next four qtrs are: -14%, -30%, 167%, 122%.

Fair Value

My long-term analysis assumes 50 million U.S. subscribers (management expects 60-90 million) and 100 million International subscribers combining to deliver $1.5 billion in revenue.

$15 billion, Revenue
-9 billion, Cost of Revenue (60%)
-3.2 billion, Marketing (7%), Technology (9%), Admin (5%)
$2.8 billion Gross Profit or $2.04 billion after taxes
$2.04 billion/425 million shares = $4.80 in profits

35x earnings on $4.80 would be a $168 stock.

Bottom Line

Netflix is in a trading range right now, but continues to grow. There’s fear of slowing growth, but some of that could have been caused by a price increase to long-term customers who decided to quit. Still, this is one of the world’s greatest franchises and just a qtr ago people were hopping on the bandwagon on news of NFLX’s Disney deal. I like this stock, but feel it could sit here a bit. NFLX ranks 21st of 37 stocks in the Growth Portfolio Power Rankings.