Netflix (NFLX) shares soared after the company reported earnings last week, as news of new subscribers impressed investors. Last quarter NFLX added 4 million subscribers to get to 57 million, up 29% from the year-ago period. Geographically, the company ended the year with 39 million streaming subscribers in the U.S. and 18 million abroad.
Last year the company expanded into Europe and this year Netflix is conquering Australia and New Zealand, and will be in 50 countries & territories overall. I feel International is where the opportunity is, but that’s where the investments are taking place and its these investments that’s hampering profits right now. The company does hope the complete the International expansion within two years, and that’s when I feel profits will be rolling in.
One Year Chart
Unfortunately, the good news of subscriber adds isn’t being felt in NFLX’s earnings estimates. 2015’s profit estimate just fell from $4.84 to $3.65. So NFLX now has a P/E of 122.
2016’s estimate also dropped from $7.49 to $5.92. But I do have a first look at 2017’s estimate which is $9.62.
I’ve thought NFLX was capable of making $10 for a while now, and this is the first time we’ve seen it in analyst estimates. If you think this company is worth 45x earnings, well you could justify the stock being worth $450. Unfortunately, that’s future earnings, so even if NFLX does make $10 in 2017 and the stock sells for 45x that, it’s still a $450 stock two years from now. Which would mean no stock growth between now and then.
Fair Value
I feel Netflix is worth 75 times this year’s earnings, since earnings are depressed with the expansion expenses. Still that gives us a Fair Value of $219, which is half what the stock is selling for. Since NFLX just jumped after it reported earnings, its safe to say the stock’s really worth $450 or more. Clearly this stock is hard to value. Hard for me anyway.
Sharek’s Take
Netflix is on a roll and expansion is key to the stock’s movement. The hard part is figuring out what NFLX will make say five years from now, putting a proper P/E on the stock, then figuring a price target, then discounting back to the present day value. So many unknowns. In the end, the basics to take away from last quarter are (1) the company is adding subscribers quickly and (2) earnings estimates just declined (3) the stock rose.
I’ll keep NFLX on the radar, but it’s a tough one to get a handle on and invest in.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
