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Forget Disney, Netflix’s Numbers Are Incredibles

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Stock (Symbol)

Netflix (NFLX)

Stock Price

$179

Sector
Technology
Data is as of
August 4, 2017
Expected to Report
Oct 16
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. Source: Thomson Financial
Sharek’s Take
David SharekDisney will start its own streaming service in 2019 and take its movies from Netflix (NFLX). Sure this hurts Netflix, but Disney is a big boy and needs its own pay-for-network. In other news, Netflix is delivering excellent profit growth, with profits possibly growing from around $0.50 last year to $1 this year and $2 next year as International expansion is paying off. Netflix could have 120 million subscribers by the end of this year; perhaps 200 million subs in five years. The company makes $119 a year for Domestic Streaming (up from $102 last year due to a price increase), $93 for Intl Streaming and $125 for its Domestic DVD by mail membership. Intl subscription prices and margins are low now but should someday rise to that of the U.S, and in the example below I use a hypothetical $120 per year subscription price on 120 million subs:

$14.4 billion, Annual Revenue
-8.6 billion, Cost of Revenue (60%)
-3.0 billion, Marketing (7%), Technology (9%), Admin (5%)
$2.8 billion Gross Profit or $2 billion after taxes
$2 billion/431 million shares outstanding = $4.64 in profits (EPS)

NFLX is worthy of a 35 P/E on $4.64 in “estimated” profits, thus my Fair Value is $162. Stock’s a little over that now but keep in mind the long-term view of 200 million subs. This is a good core growth stock, but it’s up 80% in a year so expect a pullback. 

One Year Chart
Wow, nice move up in the stock. Last qtr profits were $0.15 vs $0.09 = 67% and missed estimates by a penny. Looking ahead, Estimates for the next 4 qtrs are +167% ($0.32), +107% ($0.31), 25% ($0.50), and 180% ($0.42). Notice the (potential) jump-up in profitability? Now note NFLX only made $0.43 in all of 2016. We could be on the verge of a huge move higher for NFLX profits that could last a number of years.
Fair Value
Using the napkin analysis above, my long-term view is 200 million subscribers or $7.77 in profits per year in say five years. A 35 P/E x $7.77 in profits would equate to a $272 stock price. As it stands now my 2017 & 2018 Fair Values are $140 and $241. The stock is in the middle of those numbers now.
Bottom Line
Netflix has been a fabulous stock the last decade, and now profits from International expansion are ready to roll in. The negative isn’t the high P/E, but that this stock is extended on the charts. In fact the stock has pretty much been on a straight shot higher since the $90s. If NFLX was a big position of mine I would take profits (I did so last qtr). But with profits jumping I wouldn’t let Netflix leave me behind. NFLX ranks 22nd of 33 stocks in the Growth Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

22 of 33

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A

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David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.