Stock (Symbol)

Netflix (NFLX)

Stock Price

$192

Sector

Technology

Data is as of

November 12, 2017

Expected to Report

Jan 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

Netflix (NFLX) has been on a tear this year — but the profits have been growing faster than the stock itself. And for the first time in a long time, NFLX has a P/E below 100. It’s 85 P/E is low, and here’s why: Netflix makes good profits on its Domestic subscribers, and little-to-no profits on International subscribers. Netflix is doing a big expansion overseas, and is really trying to be the first dominant streaming service in each country. It’s spending to grow, and to get a long-term Fair Value on the stock, we have to analyze the financials, and estimate:

Total Paid Memberships:

2015: 75 million
2016: 95 million
2017: 115 million est.

In the example below I use a hypothetical $125 per year subscription price on a potential 200 million subscribers:

$25 billion, Annual Revenue
-15 billion, Cost of Revenue (60%)
-5.25 billion, Marketing (7%), Technology (9%), Admin (5%)
$4.75 billion Gross Profit or $3.35 billion maybe after taxes
$3.35 billion/433 million shares outstanding = $7.75 in profits (EPS)

If NFLX was to earn $7.75 in a few years and get a 35 P/E it would be a $271 stock. That’s the long-term view. Right now this is a stock that grew profits 146% last qtr, has a P/E of 85 and an Estimated Long-Term Growth Rate of 61%. Profits are expected to climb from around 50 cents last year to $1.25 this year, $2.25 next year and $3.75 in 2019. Everything here looks good except the stock chart. NFLX stock has had a great 2017, and is in need of a breather. Still, these figures are representative of a shining star in the stock market.

One Year Chart

The only negative here is NFLX missed profit estimates last qtr. But future estimates surged, which is even better. Qtrly profit Estimates are now 180%, 38%, 240% and 107%. If profits double in 2018 the stock might be able to double too — if it keeps that 85 P/E. But that P/E is bound to come down as NFLX gets closer to reaching its potential.

Fair Value

If I put an 80 P/E on the stock I get a $181 Fair Value for 2018 and $300 Fair Value for 2019. But this is all just guesstimating at this point.

Bottom Line

Netflix has been one of the best stocks of all time, and now that the company is making a lot of its own content, content costs are more under management’s control. Netflix Originals can be watched over and over with little cost to the company, whereas studios negotiate fees that are often based on number of views. With profits doubling right now, this stock is hot, but it is on a roll and there’s bound to be some profit taking. I think new investors should try to get in around $185. NFLX ranks 15th of 35 stocks in the Growth Portfolio Power Rankings.