Thematic evaluation
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Netflix, Inc. (NFLX)

September 06, 2024

Compared to: Comcast Corp. (CMCSA) | The Walt Disney Co. (DIS) | Technology Select Sector SPDR Fund (XLK)

Our reasoning

Netflix appears moderately undervalued based on its strong financial performance, market leadership position, and growth prospects in advertising and international markets. The company's valuation multiples, while above some industry averages, do not fully reflect its superior profitability metrics and potential for continued high growth. However, significant risks such as intense competition and content costs temper the degree of undervaluation.

Key takeaways
  • Netflix is a leading global entertainment service provider with a strong financial foundation, a track record of growth, and a commitment to innovation.
  • The company's revenue growth, profitability, and operational efficiency are all impressive, and its future outlook is positive.
  • Netflix faces significant risks, including intense competition, content acquisition costs, and regulatory challenges.
  • The company's high valuation and volatile stock price also suggest a higher level of risk for investors.
  • Netflix's advertising business is scaling, but it is not yet a primary driver of revenue growth. The company is focused on improving its ad tech capabilities, expanding demand sources, and enhancing the user experience and advertiser features.
  • The company's live event offerings, including NFL games and various other high-profile events, are aimed at driving engagement and monetization.
  • Netflix's gaming initiative is progressing, with plans to continue scaling the business and connecting it to popular Netflix IP.
  • Overall, Netflix is a high-growth, high-risk investment with a strong track record of success. Investors should carefully consider their risk tolerance and investment goals before investing in the company.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Netflix, Inc. is a global entertainment service provider with a subscription-based business model. The company offers a wide range of streaming content, including TV series, films, documentaries, and games, to its over 260 million paid members in over 190 countries.
    • Netflix generates revenue primarily from its streaming subscriptions, with additional revenue streams from advertising, consumer products, and other sources. The company's target market is a broad audience of consumers seeking entertainment content, with a focus on attracting and retaining members through a diverse and high-quality content library.
    • For comparative analysis, we will be using the Technology Select Sector SPDR Fund (XLK) as a benchmark and Comcast Corp. (CMCSA) and The Walt Disney Co. (DIS) as industry peers.

  2. Financial Performance:

    • Netflix has demonstrated strong revenue growth in recent quarters, driven by increased subscriber growth and the introduction of an ad-supported subscription plan. The company's revenue growth has been consistently above 10% for the past year, with a 17% increase in the most recent quarter.
    • Profitability has also been improving, with expanding margins driven by revenue growth and effective cost management. Netflix's operating income margin has increased by 5 percentage points year-over-year in the most recent quarter, and the company is targeting a 26% full-year operating income margin.
    • Netflix's profitability ratios are significantly higher than the industry average, highlighting its strong competitive advantage in terms of content acquisition and production. The company's return on average assets (ROA), return on average total equity (ROE), and return on average invested capital (ROIC) have all been consistently above the industry average.
    • Compared to its peers, Netflix has consistently outperformed both CMCSA and DIS in terms of revenue growth, profitability, and return on equity. However, it's important to note that NFLX's performance has been more volatile, with larger swings in returns.

  3. Operational Efficiency:

    • Netflix's balance sheet analysis reveals a strong liquidity position, with ample cash and short-term investments to cover its short-term obligations. However, the decreasing current ratio suggests a potential need to monitor working capital management closely.
    • The company's cash flows from core business operations are generally strong, with increasing net income and depreciation, depletion, and amortization. Netflix's free cash flow is expected to remain healthy, providing flexibility for future investments and debt repayment.
    • Netflix's capital expenditure analysis shows a consistent trend of investing in content and technology, with a focus on expanding its content library and improving its streaming platform. The company's depreciation trends are in line with its capital expenditure, indicating a healthy investment cycle.
    • Netflix's dividend and share repurchase sustainability analysis indicates that the company is focused on reinvesting its earnings back into the business, with no current dividend payments and a significant share repurchase program.
    • Compared to its peers, Netflix has a lower current ratio and a higher debt-to-equity ratio, indicating a more leveraged capital structure. However, the company's cash flow to total debt ratio is significantly higher than the industry average, indicating a strong ability to cover its debt obligations.

  4. Growth Opportunities:

    • Netflix is actively expanding its market reach through geographic expansion, particularly in emerging markets like India. The company is also investing in local content creation to cater to diverse audiences and enhance its global appeal.
    • Netflix is exploring new content genres, including live events, games, and interactive experiences, to diversify its offerings and attract a wider range of viewers. The company is also investing in its advertising business, which is expected to become a more significant driver of revenue growth in the future.
    • Netflix's strategic focus areas include improving its product experience, expanding into new content genres, and translating value for members more effectively. The company is also exploring the use of generative AI to enhance its recommendation and discovery systems.
    • Management has demonstrated a strong track record of executing strategic plans, with a focus on innovation and growth. The company's recent initiatives, such as the introduction of an ad-supported subscription plan and the expansion of its live event offerings, have been successful in driving subscriber growth and revenue.

  5. Risks and Threats:

    • Netflix faces intense competition from traditional and emerging entertainment providers, as well as the ongoing threat of piracy, which could impact its ability to attract and retain members.
    • The company's significant investments in content, both licensed and self-produced, expose it to various risks, including potential liabilities and cost overruns, which could affect its financial performance.
    • Netflix's international expansion and reliance on foreign markets introduce currency exchange risks and regulatory challenges that could hinder its growth.
    • The company's increasing reliance on advertising revenue could expose it to fluctuations in advertising spending and changes in consumer behavior.
    • Netflix's business model is also vulnerable to changes in consumer preferences and the emergence of new technologies, which could disrupt the streaming market.

  6. Valuation Analysis:

    • Netflix's valuation metrics, such as its price-to-earnings (P/E) ratio and enterprise value-to-EBITDA (EV/EBITDA) ratio, are currently above the industry average, reflecting the company's strong growth prospects and market leadership.
    • Compared to its peers, Netflix's valuation metrics are higher, indicating a premium valuation. This is likely due to the company's strong growth trajectory and its dominant position in the streaming market.
    • Potential catalysts for Netflix's future growth include the continued expansion of its subscriber base, the successful scaling of its advertising business, and the development of new content genres.

  7. Price Performance:

    • Netflix's stock price has generally outperformed the Technology Select Sector SPDR Fund (XLK) over the past three years, particularly in the short-term periods. However, over the longer term, XLK has outperformed NFLX.
    • Compared to its peers, Netflix's stock price has consistently outperformed both CMCSA and DIS over all periods, with significantly higher returns. However, it's important to note that NFLX's performance has been more volatile, with larger swings in returns.
    • Netflix's stock price has been more volatile than both XLK and its peers, with a higher beta value. This suggests that NFLX is a higher-risk investment than its peers, as its stock price is likely to fluctuate more in response to market changes.

  8. Future Outlook:

    • Management has provided an optimistic outlook for the future, reiterating their commitment to sustaining healthy revenue growth and margin expansion in the coming years. The company is focused on improving its product experience, expanding into new content genres, and translating value for members more effectively.
    • Analyst estimates for Netflix's future performance are generally positive, with expectations for continued revenue growth and margin expansion. However, there is some uncertainty around the timing of content spend and taxes.
    • Key factors that could impact Netflix's future performance include the competitive landscape, the evolution of consumer preferences, and the company's ability to successfully execute its strategic initiatives.

  9. Summary:

    • Netflix is a leading global entertainment service provider with a strong financial foundation, a track record of growth, and a commitment to innovation. The company's revenue growth, profitability, and operational efficiency are all impressive, and its future outlook is positive.
    • However, Netflix faces significant risks, including intense competition, content acquisition costs, and regulatory challenges. The company's high valuation and volatile stock price also suggest a higher level of risk for investors.
    • Overall, Netflix is a high-growth, high-risk investment with a strong track record of success. Investors should carefully consider their risk tolerance and investment goals before investing in the company.
Peer fundamentals 
Fundamentals
Insights
  • Netflix is a leading global entertainment service with strong revenue growth and profitability, driven by increased subscriber growth and the introduction of an ad-supported subscription plan.
  • The company is effectively managing its costs, resulting in improved profitability margins and a strong competitive advantage compared to its peers.
  • Netflix maintains a strong liquidity position and a conservative capital structure, with a focus on reducing leverage.
  • The company's cash flow generation is healthy, providing flexibility for future investments and debt repayment.
  • Key risks include potential working capital management challenges, the need to monitor cash flow generation closely, and intense competition in the entertainment industry.
  • Netflix's future outlook is positive, with continued revenue growth, margin expansion, and a strong financial foundation.
Analysis
  • Revenue - Netflix's revenue growth is strong and sustainable, driven by increased subscriber growth and the introduction of an ad-supported subscription plan. - The company's revenue growth is driven by its strategic initiatives, such as expanding its content offerings and introducing an ad-supported subscription plan. - The company's management has expressed confidence in its ability to continue delivering healthy revenue growth in the coming years.
    • Profitability
      • Netflix's profitability is strong and improving, driven by revenue growth and margin expansion.
      • The company is effectively managing its costs, resulting in improved profitability margins.
      • The introduction of an ad-supported subscription plan is contributing to revenue growth and margin expansion.
      • Netflix's profitability ratios are significantly higher than the industry average, highlighting its strong competitive advantage in terms of content acquisition and production.
    • Liquidity
      • Netflix maintains a strong liquidity position, with ample cash and short-term investments to cover its short-term obligations.
      • The decreasing current ratio, however, suggests a potential need to monitor working capital management closely.
      • The company's liquidity ratios are lower than the industry average, indicating that Netflix may have a lower level of liquidity compared to its peers.
    • Solvency
      • The company's long-term solvency appears healthy, with a decreasing debt-to-equity ratio and a focus on reducing leverage.
      • Netflix's solvency ratios are significantly lower than the industry average, suggesting that the company has a more conservative capital structure compared to its peers.
    • Operational Efficiency
      • The increasing return on average total assets indicates that Netflix is effectively utilizing its assets to generate profits.
      • The increasing EBITDA margin indicates that the company is becoming more efficient at generating cash flow from its operations.
      • Netflix's operational efficiency ratios are significantly higher than the industry average, demonstrating its strong operational efficiency.
    • Cash Flow Analysis
      • Cash flows from core business operations are generally strong, with increasing net income and depreciation, depletion, and amortization.
      • The company's free cash flow is expected to remain healthy, providing flexibility for future investments and debt repayment.
      • The company's cash flow to total debt ratio is significantly higher than the industry average, indicating that Netflix has a strong ability to cover its debt obligations.
    • Risk Factors
      • The decreasing current ratio suggests a potential need to monitor working capital management closely.
      • The decreasing free cash flow margin suggests a potential need to monitor cash flow generation closely.
      • The company faces intense competition from traditional and emerging entertainment providers, as well as the ongoing threat of piracy, which could impact its ability to attract and retain members.
      • Netflix's significant investments in content, both licensed and self-produced, expose it to various risks, including potential liabilities and cost overruns, which could affect its financial performance.
      • The company's international expansion and reliance on foreign markets introduce currency exchange risks and regulatory challenges that could hinder its growth.
    • Future Outlook
      • Netflix is expected to continue growing its revenue and profitability in the coming quarters, driven by its strategic initiatives and the continued expansion of the streaming market.
      • The company's focus on cost management and operational efficiencies is expected to continue to drive margin expansion.
      • The company's advertising business is expected to scale and become a more significant driver of revenue growth in the future.
      • The company's free cash flow is expected to remain healthy, providing flexibility for future investments and debt repayment.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-08-20)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison: NFLX has generally outperformed XLK over the past three years, particularly in the short-term periods (YTD, 1 Week, 1 Month, 3 Months, 6 Months, and 1 Year). However, over the longer term (3 Years), XLK has outperformed NFLX. This suggests that NFLX may be more suitable for investors with a shorter-term investment horizon.
  • Risk and Return Analysis: NFLX has provided higher annualized returns than XLK over the past two years, but it has also been significantly more volatile. This suggests that NFLX offers the potential for higher returns, but it also carries a higher level of risk.
  • Risk-Adjusted Performance: XLK has consistently offered a better risk-adjusted return than NFLX, as evidenced by its higher Sharpe ratio. This suggests that XLK may be a more attractive investment for risk-averse investors.
  • Overall Assessment: NFLX has been a strong performer over the past three years, but it has also been a riskier investment than XLK. Its high volatility and large drawdowns suggest that it is more suitable for investors with a higher risk tolerance and a shorter-term investment horizon. XLK, on the other hand, has been a more consistent performer with lower volatility and a better risk-adjusted return, making it a more attractive option for risk-averse investors.
Peers Price History(as of 2024-09-04)
Comcast Corp. (CMCSA)The Walt Disney Co. (DIS)
  • Performance Comparison:
    • NFLX has consistently outperformed both CMCSA and DIS over all periods, with significantly higher returns. This suggests that NFLX has been a more successful company in terms of growth and profitability. However, it's important to note that NFLX's performance has been more volatile, with larger swings in returns.
  • Risk and Return Analysis:
    • NFLX has provided higher annualized returns than both CMCSA and DIS, but it has also been significantly more volatile. This indicates that investors in NFLX have been rewarded with higher returns, but they have also taken on a higher level of risk.
    • NFLX's annualized volatility has been consistently higher than both CMCSA and DIS, indicating a higher risk profile. This is further supported by the drawdown figures, which show that NFLX has experienced larger and more frequent drawdowns than its peers.
  • Risk-Adjusted Performance:
    • NFLX's Sharpe Ratio has generally been lower than both CMCSA and DIS, indicating that it has not provided as good risk-adjusted returns. This suggests that while NFLX has generated higher returns, it has not done so as efficiently as its peers.
    • NFLX's beta value is consistently higher than both CMCSA and DIS, indicating that it is more sensitive to market movements. This suggests that NFLX is a higher-risk investment than its peers, as its stock price is likely to fluctuate more in response to market changes.
  • Overall Assessment:
    • NFLX has been a high-growth, high-risk investment compared to CMCSA and DIS. It has consistently outperformed its peers in terms of returns, but it has also been significantly more volatile. This suggests that investors in NFLX have been rewarded with higher returns, but they have also taken on a higher level of risk. The recent trends in volatility and Sharpe Ratio suggest that NFLX may be becoming less volatile and more efficient in its risk-adjusted returns. However, it is still a higher-risk investment than its peers.
    • Investors should carefully consider their risk tolerance and investment goals before investing in NFLX.
Peers Fundamentals(as of 2024-06-30)
Comcast Corp. (CMCSA)The Walt Disney Co. (DIS)

  1. Market Position and Size:

    • NFLX has a significantly larger market capitalization than its peers, CMCSA and DIS, indicating a dominant position in the streaming market.
    • Despite its large market cap, NFLX's revenue is significantly lower than its peers, suggesting its valuation is driven by growth potential and market share.
    • NFLX's profitability, as measured by EBITDA and net income, is relatively strong compared to DIS but lower than CMCSA.

  2. Profitability and Efficiency:

    • NFLX exhibits significantly higher Gross Profit Margin, EBITDA Margin, and Net Profit Margin compared to peers and the industry average, highlighting its efficient business model.
    • NFLX's profitability is strong despite lower revenue and net income, suggesting efficient conversion of revenue into profit.

  3. Financial Health and Stability:

    • NFLX's liquidity is lower than peers and the industry average, as indicated by its Current Ratio and Quick Ratio.
    • NFLX's debt position is relatively strong compared to peers and the industry average, as shown by its Total Debt to Total Equity Ratio and Debt / EBITDA.
    • Overall, NFLX's financial health is strong, characterized by high profitability and robust growth, but with lower liquidity compared to peers.

  4. Valuation and Market Perception:

    • NFLX's valuation metrics, such as Enterprise Value To Sales, Enterprise Value To EBITDA, Price To Earnings, Price to Book Ratio, and Price To Sales Ratio, are significantly higher than peers and the industry average.
    • The market places a premium on NFLX's growth potential and market share, which may be unsustainable in the long term.

  5. Cash Flow and Capital Management:

    • NFLX generates less cash flow from its operations and has lower free cash flow compared to its peers, suggesting less efficient cash flow generation.
    • NFLX invests less in capital expenditures than its peers, indicating a focus on growth rather than capital-intensive investments.

  6. Growth and Future Prospect:

    • NFLX shows consistently higher growth in sales/revenue, EBITDA, net income, basic earnings per share, and book value per share compared to the peer group average.
    • NFLX's growth rates have been consistently increasing over the 5-year period, suggesting accelerating growth.
    • NFLX's growth is balanced across different metrics, indicating sustainability and not being concentrated in specific areas.

  7. Potential for Investment:

    • NFLX's strong growth potential, high profitability, and efficient returns on capital make it an attractive investment.
    • However, its lower liquidity and cash flow generation, as well as its high valuation, present potential risks.

  8. Key Risks and Considerations:

    • NFLX's lower liquidity and cash flow generation compared to peers could pose challenges in the future.
    • Its high valuation may be unsustainable in the long term, potentially leading to a decline in share price.
    • Increased competition in the streaming market could impact NFLX's growth and profitability.

  9. Overall Assessment:

    • NFLX is a financially strong company with a dominant position in the streaming market. Its high profitability, strong returns on capital, and robust growth make it an attractive investment.
    • However, its lower liquidity and cash flow generation, as well as its high valuation, present potential risks. Investors should carefully consider these factors before making an investment decision.