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Netflix Gets Back on Track With a Solid Quarter

Stock (Symbol)

Netflix (NFLX)

Stock Price

$122

Sector
Technology
Data is as of
November 7, 2016
Expected to Report
Jan 17 – 23
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) popped after subscriber growth came in above expectations. The company added 3.6 million new subscribers, and now has 87.5 million subscribers worldwide (including DVD rentals). These new ads were well above the 1.7 million it added the prior earlier (which disappointed investors and sent the stock down). Now the company anticipates adding 5.2 million subscribers this qtr, which would get it above 92 million, 21% more than it had at the end of last year. If the company gets 20% more subs in 20017 it will have 110 million. Overall NFLX makes $112 per year from a Domestic streaming customer, $92 per year for an International one, with more Domestic clients right now than International ones. So basically my napkin analysis for 2017 is $100 x 110 million = $11 billion in annual sales. Here’s my take on NFLX’s cash flow, assuming International profit margins will someday match those of the US:

$11 billion, Annual Revenue
-6.6 billion, Cost of Revenue (60%)
-2.3 billion, Marketing (7%), Technology (9%), Admin (5%)
$2.10 billion Gross Profit or $1.52 billion after taxes
$1.52 billion/429 million shares outstanding = $3.54 in profits (EPS)

A 45 P/E x $3.54 in profits equates to a $159 stock price and that’s where I think NFLX should be headed towards next year. Long-term 150 to 200 million subscribers is achievable, which using quick math and a 35 P/E could mean a $222 stock.

One Year Chart
nflx_2016_q4Nice profit numbers the company has posted the last three qtrs. LAst qtr NFLX was expected to have -14% profit growth and came thru with 71%. That’s amazing. Analysts estimated profits of $0.06 vs $0.07 a year ago and NFLX came in with $0.12. Next qtr’s estimate also surged higher on the news, and the further out qtrs got bumped up too. Now profit Estimates for the next 4 qtrs are: 30%, 200%, 156% and 117% — those are excellent figures and could cause the stock to shoot up once again. I love the Est LTG of 74% per year, and think maybe my Fair Value P/E of 35 I just did above is too low.
Fair Value
nflx_2016_q4_phNFLX has a high P/E right now, but analysts estimate profits going from $0.40 this year to $1 next year, $2 in 2018 and $3 in 2019. Then you have to guess at a multiple to put on that type of growth, yet also consider subscriber growth could slow in coming years as Netflix smothers the globe. Honestly, its tough to estimate where NFLX will be years from now because we can’t accurately judge what the P/E will be. I can say things look good here in the numbers department, and I’m a fan of the stock.
Bottom Line
nflx_2016_q4_10yrNetflix is poised to break out now that it’s got its mojo back. Long-term this company is canvasing the world and has excellent growth opportunity. But still the stock is prone to swings due to investors nitpicking qtrly subscriber additions. I like NFLX a lot and the stock ranks 20th of 36 stocks in the Growth Portfolio Power Rankings. I don’t have it in the Aggressive Growth Portfolio because I have a lot of tech in there now and don’t want to do too much. Also, the P/E on this stock is high and that makes NFLX susceptible to big price swings.
Power Rankings
Growth Stock Portfolio

20 of 36

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A

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