In the volatile world of the US stock market, few success stories rival that of Netflix’s (NFLX) remarkable turnaround. Just a year ago, the streaming giant was hemorrhaging subscribers and shedding market value, labeled the worst S&P 500 performer.
Today, it stands as a Wall Street darling, outshining industry titans and boasting a market cap that rivals the combined might of Disney, Discovery, and Paramount.
Those prudent analysts that predicted its rise, with the developing writers’ strike have been proven correct, with a 20% profit surge and an impressive $6.5 billion in free cash flow, up from $1.6 billion in 2022.
As we explore the secrets behind Netflix’s resilience and success, we’ll uncover enduring business strategies that have propelled it from a DVD-by-mail service to a Hollywood powerhouse, consistently defying the odds and standing tall amid industry upheavals.
Join us on a journey to unlock the secrets of investing in Netflix 101.
Netflix Profitability: A Winning Formula
The first thing to know about investing in Netflix is its immense profitability. As a pioneer in the digital streaming space, Netflix has successfully navigated this challenging terrain since 2016.
Notably, the company has consistently expanded its profit margins, revealing a savvy financial strategy.
Analyzing Netflix’s EBIT margins showcases a remarkable journey. The Barbell Investor notes this upward trajectory, indicative of Netflix’s adept handling of financial dynamics.
In a recent Q3 FY23 earnings call, CFO Spencer Neumann confidently remarked, “We don’t think we’re anywhere near a margin ceiling,” suggesting continued potential for growth.
Key to this success is Netflix’s strategic management of content spending. Despite total content spend remaining relatively stable, the percentage of revenue allocated to it has decreased from around 77% in 2016 to approximately 50% in 2023.
This cost-control measure has contributed significantly to the impressive profit margins.
Furthermore, Netflix’s commitment to expanding its membership and Average Revenue per Member (ARM) while maintaining content spending stability has yielded substantial free cash flow gains, as illustrated by The Barbell Investor’s insights.
Understanding the full picture of Netflix’s profitability is crucial for investors assessing the stock’s performance in the current year.
The company’s adept financial maneuvers, coupled with its global dominance across various metrics, underscore the effectiveness of its decade-long strategic approach, positioning Netflix as a formidable force in the streaming industry.
Valuation
So now having ascertained the remarkable profitability of Netflix, we ask ourselves a critical question: Is investing in Netflix viable from a value standpoint?
Netflix’s current valuation metrics offer both promise and caution for prospective investors. At $489 per share, the P/E ratio stands at 47.1x, reflecting the market’s high expectations for future earnings.
The P/FCF ratio is 36.4x, indicating the price investors are willing to pay for each dollar of free cash flow. Forward P/E, a projection of future earnings, sits at 30.9x, hinting at a slightly more optimistic outlook.
The PEG ratio at 1.9x suggests a balance between the P/E ratio and the expected growth rate, with a figure below 1 typically considered undervalued.
Meanwhile, the EV/EBITDA ratio is 10.4x, and EV/FCF is 37.5x, providing insights into the company’s enterprise value in relation to earnings and free cash flow.
Crucially, a 5-year revenue growth forecast of 10% and a robust 22.4% for EPS growth underscore positive expectations. However, investors must remain vigilant for short-term fluctuations.
The current optimism is grounded in Netflix’s ability to sustain its competitive edge, but navigating potential challenges is essential.
As with any investment, understanding these valuation metrics is paramount—balancing enthusiasm with a clear-eyed assessment of risk will be key for investors eyeing Netflix in the coming year.
Incredible Pricing Power
Those that are especially keen on investing in Netflix should know one thing: Netflix’s strongest weapon in its belt is its incredible pricing power. This positions it for significant outperformance in the first half of 2024.
In a strategic move, Netflix raised prices for its Basic and Premium plans to $11.99 and $22.99 per month, marking the second hike this year.
In contrast, major competitors like Amazon Prime, Disney+, Hulu, Warner Bros. Discovery, and Apple TV also increased prices, averaging a notable 23% rise—well above the 3.7% 12-month inflation rate in September.
Netflix’s pricing power shines through its ability to implement price hikes while experiencing higher subscriber growth than the sector average.
The recent quarter showcased a surprise boost in subscribers, reaching 247.15 million versus the anticipated 243.88 million.
Notably, the company maintained ad tier plan prices despite ad spend challenges, achieving a 70% QoQ growth in 3Q23. This, coupled with a commitment to original content, positions Netflix favorably amid macro uncertainties.
The company’s resilience during the resolved SAG-AFTRA negotiations reinforces its capacity to reaccelerate subscriber growth, supported by a robust free cash flow projection of $6.5 billion.
Investors can leverage Netflix’s pricing power and content strategy as key indicators for its sustained outperformance in the dynamic streaming landscape.
