A Netflix Revival (NASDAQ:NFLX) | Seeking Alpha

US Online Streaming Giant Netflix : Illustration

Pascal Le Segretain

On April 20th of this year, Netflix, Inc.’s (NASDAQ:NFLX) stock fell over 35% in a single day due to a net loss of subscribers, and the projection of more losses in subsequent quarters. Since that day, the stock fell another 43% hitting a bottom of $162.70 per share on May 12th.

At yesterday’s closing price of $244.11, the stock has rebounded 50% from its low. Even with this recent jump in the stock price, I believe the stock has a reasonable valuation to reward patient investors who have been waiting for an entry point to buy the stock.

Netflix Chart

Google Finance

Reasonable Valuation

Over the last two years (prior to April 20th), Netflix stock had been trading at a significant premium relative to the market and its own growth prospects. In the last article I wrote about Netflix on April 16, 2020 titled “Netflix: Late to the Party“, I wrote “with the stock trading at an all-time high of $439.17, and a price-to-earnings ratio of over 100, the stock is trading at a significant premium that would be difficult to justify buying at this price.” Now, the stock is trading at a modest 21 times earnings, which is more at par with what I estimate to be its growth rate moving forward.

When a company’s stock experiences a major correction as it has this year with Netflix, investors can expect an overcorrection beyond what the fundamentals justify. The bad news that the company announced on April 19th was that they lost approximately 200,000 subscribers and anticipated another two million subscribers lost in the 2nd quarter.

In their most recent quarterly report on July 19th, Netflix reported only losing an additional one million subscribers (not two million as projected) and estimated gaining one million subscribers in the following quarter. With over 221 million subscribers worldwide, 1.2 million is approximately ½ of 1 percent. As a result, the degree to which the stock price dropped over 68% doesn’t match the impact of losing ½ a percent of its subscriber base. This is why the stock was overvalued and where patient long term investors can now be rewarded with an entry point.

Smash Hits

Despite the stock’s troubles of late, investors should be reminded that this is a company that continues to lead all other streaming services in the key metrics of number of paid memberships, engagement, revenue and profit. In fact, Netflix’s share of U.S. TV viewing is almost as big as the top two most watched TV networks (CBS & NBC) combined.

Netflix Share of US TV Viewing

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Even with increased competition in the streaming space, Netflix continues to produce original smash hits such as Stranger Things and Bridgerton. In the first four weeks of the release of its latest season, Stranger Things had over 1.3 billion hours viewed. Netflix hits become so popular that they end up influencing pop culture with the Twitter volume of Stranger Things exceeding that of Top Gun Maverick.

Stranger Things

Netflix

Growth is Global

With 60% of the company’s revenues generated outside the U.S., Netflix is positioned well to continue to expand and grow, capitalizing on its leadership in streaming overseas. In addition, Netflix’s focus on local language content is a competitive advantage that other streaming services have not matched. In fact, three of the six most popular TV seasons of all time are non-English language titles. Among them is Squid Game, which is the most watched show or movie ever on Netflix with over 1.6 billion hours viewed.

Squid Game

Netflix

Yet, Netflix has other levers to pull for growth. With their acknowledgement that Netflix’s service is being shared with over 100 million households, there is an opportunity to monetize additional revenue. Using their test case in Latin America, they were able to increase year-over-year revenue growth per membership from 8% to 14% the last two quarters.

Lastly, Netflix will be adding an advertising-supported pricing tier to entice subscribers wanting a lower price alternative. I believe that what Netflix gives up in pricing power with a lower price tier will be made up and surpassed with the revenues generated from advertising.

Analysis

Buy Rating: I have a Buy rating for Netflix’s stock with a five-year target price of $501 per share.

As a long term investor, I provide a 5-year price target. In identifying a stock for a Buy rating, I look for stocks that can double in price within 5 years. This would produce close to a 20% annual return which would still exceed the market’s long term average annual return of 8.91%.

When estimating a target price in the future, I try to be as transparent as possible in the methodology and metrics I use in my analysis and research to gain the reader’s confidence in my conclusions. This is a methodology that I have successfully used for over 25 years as an investment adviser and portfolio manager through the bull market of the 1990s, the dot com bubble, the credit crisis of 2008-2009 and more recently through the Great Recession.

In my analysis of Netflix stock, I believe the company can grow their revenue long term in the low double digits. I used a 12% growth rate in revenue. With the company’s stated goal of maintaining a 20% profit margin, I believe they can achieve a net margin of 16% that has the potential to increase over time as ad revenues are incorporated.

Finally, with the stock’s price-to-earnings ratio (P/E) at 21, there is room for expansion into the high 20s as the overall market rebounds. In addition, as the company’s initiatives in monetizing paid sharing and advertising begin to be reflected in their financials, the stock’s valuation could expand further.

Below is a table contrasting the company’s current metrics and stock price to the 5-year estimate:

Netflix

Current (as of 8/10/22)

*metrics based on fiscal year

end 2021

5-Year Estimate

Revenue (in millions)

$29,698

$46,730

Net Margin (%)

17.24%

16.42%

Net Income (in millions)

$5,120

$7,673

# Outstanding Shares

455,516,000

444,352,000

Net Income per Share

$11.24 per share

$17.27 per share

Price/Earnings (P/E) Ratio

21.72

29

Stock Price

$244.11

$501

Source of company metrics: Morningstar, Netflix

Even though the revival in Netflix’s stock has already begun as seen in the recent climb from its 52-week low, the table above shows there is more upside in the future. In other words, it’s not too late to join the party.

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