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Netflix’s Disney Deal is Boosting NFLX Stock

Stock (Symbol)

Netflix (NFLX)

Stock Price

$91

Sector
Technology
Data is as of
April 28, 2016
Expected to Report
Jul 13 – Jul 18
Company Description
netflix_ipadNetflix, 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) has come to life with news it will be the first to stream new Disney movies that debuted after 2015. This deal was signed 3 years ago, and is getting attention today, which is good because its this might be the attention the stock needs to make another run higher. According to my analysis Netflix will have 100 million subs by the end of 2016. Since the company is sacrificing profits to grow, International costs are high and revenue per subscriber is low, but let’s assume these percentages someday approach America’s like NFLX’s 2nd biggest market Canada already has. US streaming subscribers pay around $100 a year.

$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)

In this hypothetical, if NFLX’s Intl margins could rise to those of the US, and the stock is worth 40x earnings, the stock would be $130 a share. Although that’s not happening now there are other catalysts the stock can have such as more International subscribers than estimated, a rise in the monthly subscription price, and more subscribers do to families wanting Disney movies.

One Year Chart
NFLX_2016_Q2NFLX has been stuck in a consolidation pattern for a year now, but is up $4 to $99 today on the Disney news, and crossed its 50 day moving average on high volume. That’s institutional money buying in. Although the company had 20% profit growth last qtr, it spends to grow and capture market share in International markets. Sales increased 24% last qtr which is about what revenue has been growing at. P/E is high but my analysis below paints a different picture.
Fair Value
NFLX_2016_Q2_PHMy long-term analysis — say in 3-5 years — points to a $168 stock. The U.S. nearing saturation of 50 million subscribers and International streaming could reach 100 million subscribers so overall Netflix could have 150 million subscribers earning it $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
NFLX_2016_Q2_10yrMy calculations show Netflix would be worth $130 if International profit margins were as good as America’s and $168 in 3-5 years as a more mature company. Either way with the stock around $100 I feel NFLX is a good long-term investment. Sales growth is solid and when growth stocks come back into favor NFLX might get hot again. I will purchase NFLX in the Growth Portfolio where it will rank 25th of 38 stocks in the Power Rankings.
Power Rankings
Growth Stock Portfolio

25 of 38

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A

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