Weekly Valuation – Valutico | December 01, 2023
Founded in 1997, Netflix, initially a DVD rental service, evolved into a streaming giant by 2007. With over 12,000 employees and 200 million subscribers worldwide, it has significantly influenced global entertainment consumption through its user-friendly platform, accessible on various devices. Netflix continues to lead in the evolving entertainment industry.
What’s happening with the company
Netflix has just experienced its largest rise of new subscribers since the COVID-19 lockdowns in 2020. Last quarter, Netflix managed to add 8.8 million global subscribers. In addition to this, their profit also increased as Netflix has become more strict with their password sharing. This surge in users, however, came hand-in-hand with a price increase. Netflix has just announced that its add-free plan will increase from $20 to $23 per month while their basic plan will go from $10 to $12 per month. The outcome of Netflix’s price hike is uncertain: it may boost profits with rising subscribers or risk customer dissatisfaction.
Netflix’s Q3 results showed immense growth and expansion. Due to their higher than expected subscription growth this most recent quarter, their revenue grew by 8% year-over-year which was more than anticipated. Netflix’s operating income in Q3 was $1.9B which is a 25% increase from 2022 Q3. Since Netflix has been experiencing higher engagement and is second in percentage of screen time usage behind YouTube, they have high expectations for Q4 and beyond. Many Netflix originals prove to be performing well which is part of the reason why they expect their Q4 revenue to be $8.7B, up 11% year-over-year. Netflix’s analysis and expectations are going in the right direction as they look to close out the year strongly.
Stock Market Implications
In the recent past, most notably in 2020 and 2021, Netflix experienced considerable growth in the stock market. Due to the COVID-19 shutdowns in 2020, new subscriptions increased dramatically. This positive influx persisted until 2022 when Netflix began to crack down on password sharing. As a result of more stringent rules on password sharing, many customers became unhappy and Netflix experienced a drop in their stock. After this dramatic shift downward, Netflix was able to regain some consumer confidence and they have started to reclaim some of their lost ground. After this most recent successful quarter, expectations are high and many believe Netflix is on the path to even greater success.
We conducted a thorough analysis of Netflix employing the Discounted Cash Flow (DCF) methodology, particula
rly leveraging our
DCF WACC approach, alongside a Trading Comparables analysis. The DCF analysis yielded an equity value of USD 125 billion, predicated on a WACC of 10.1%.
Additionally, the Trading Comparables analysis generated a valuation range of USD 85.4 billion to USD 150 billion, by utilizing observed metrics such as EV/EBITDA, EV/EBIT, and P/E ratios. For a robust comparative landscape, we enlisted similar market players like Alphabet Inc.(Youtube), Apple Inc. (Apple TV) and Amazon.com Inc. (Amazon Prime Video). Netflix is currently trading at a market capitalization of $209 billion which is significantly higher than the valuation range based on the trading multiples of the peers.
The higher trading multiples of the company can be partly attributed to the higher operating margins and sales growth forecasts compared to the median of the peers based on our analysis. However, we still believe the company to be overvalued considering the lower valuation ($125 billion versus the current market cap of $209 billion) from our DCF WACC Approach which is based on the analyst’s consensus estimates of the Company’s financial performance.
As we move ahead, there are questions about how well Netflix earnings will hold up and if the stock price is expected to undergo market correction?
This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.