NFLX Stock Study (10-24-23)

I recently did a stock study on Netflix Inc. (NFLX) with a closing price of $406.84. Previous studies are here, here, and here.

M* writes:

     > Netflix’s primary business is a streaming video on demand
     > service now available in almost every country worldwide
     > except China. The firm primarily generates revenue from
     > subscriptions to its eponymous service. Netflix delivers
     > original and third-party digital video content to PCs,
     > internet-connected TVs, and consumer electronic devices,
     > including tablets, video game consoles, Apple TV, Roku,
     > and Chromecast. Netflix is the largest SVOD platform in
     > the world with over 220 million subscribers globally.

Over the past decade, this large-size company has grown sales and earnings at annualized rates of 26.6% and 58.4%, respectively. Lines are mostly up, narrowing, and parallel except for EPS declines in ’15 and ’22. PTPM lags peer and industry averages despite trending higher from 3.9% (’13) to 16.6% (’22) with a last-5-year mean of 13.4%.

Also over the past decade, ROE lags peer and industry averages despite trending up from 9.2% (’13) to 21.6% (’22) with a last-5-year mean of 26.0%. Debt-to-Capital is roughly even with peer and industry averages while increasing from 27.3% in ’13 to 66.4% in ’18 then reversing lower to 40.9% in ’22 for a last-5-year mean of 56.5%.

Interest Coverage and Quick Ratio are 7.5 and 1.1, respectively. M* gives the company a “Standard” rating for Capital Allocation while Value Line gives an A rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 7.3% YOY and 10.2% per year for ’23 and ’22-’24, respectively (based on 39 analysts).
• YF projects YOY 0.3% and 13.9% for ’23 and ’24, respectively (37 analysts).
• Zacks projects YOY 6.2% and 13.6% for ’23 and ’24, respectively (14).
• Value Line projects 9.9% growth per year from ’22-’27.
• CFRA projects 6.4% YOY and 9.9% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 10.0%/year while projecting 5-year annualized growth of 8.0% in its analyst note.

I am forecasting toward the low end of the range at 6.0% per year.

With regard to EPS growth:

• CNN Business projects 16.0% YOY and 23.0% per year for ’23 and ’22-’24, respectively (based on 39 analysts), along with 5-year annualized growth of 28.9%.
• MarketWatch projects annualized ACE of 24.2% and 23.8% for ’22-’24 and ’22-’25, respectively (48 analysts).
• Nasdaq.com projects 25.1% and 19.8% per year for ’23-’25 and ’23-’26 (15, 12, and 4 analysts for ’23, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 23.1%.
• YF projects YOY 14.6% and 29.6% for ’23 and ’24, respectively (38), along with 5-year annualized growth of 23.0%.
• Zacks projects YOY 21.1% and 31.6% for ’23 and ’24, respectively (14), along with 5-year annualized growth of 21.3%.
• Value Line projects annualized growth of 13.6% from ’22-’27.
• CFRA projects 22.6% YOY and 26.0% per year for ’23 and ’22-’24, along with a 3-year CAGR of 20.0%.
• M* gives a long-term annualized growth estimate of 15.8%.

I am forecasting just under the long-term-estimate range (mean of six: 21.0%) at 13.0% per year. I will use 2023 Q2 EPS of $9.39/share (annualized) as the initial value rather than ’22 EPS of $9.95.

My Forecast High P/E is 35.0. Over the past decade, high P/E has decreased from 211 (’13) to 61.3 (’22) with a last-5-year mean of 93.9. The last-5-year-mean average P/E is 71.0. At some point, I expect P/E to fall back to earth. For now, I am forecasting at the upper end of my comfort zone.

My Forecast Low P/E is 30.0. Over the past decade, low P/E has decreased from 49.1 (’13) to 16.4 (’22) with a last-5-year mean of 48.1. Again, at some point I expect P/E to fall back to earth and we may already be starting to see this with a current P/E of 43.3. I am forecasting toward the bottom of the range (only ’22 is lower).

My Low Stock Price Forecast (LSPF) is $281.70: default based on $9.39/share initial value. This is 30.8% less than the previous close but 11.7% greater than the 52-week low.

These inputs land NFLX in the HOLD zone with a U/D ratio of 1.6. Total Annualized Return (TAR) is 8.3%.

PAR (using Forecast Average—not High—P/E) of 6.7% is less than I seek for a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 182 studies (my study and 40 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 10.0%, 12.9%, 48.5, and 30.0. I am lower on the first and third but slightly higher on the second (13.0%). Value Line’s projected average annual P/E of 38.0 is lower than MS (39.3) and higher than mine (32.5).

MS high / low EPS are $17.54 / $9.27 versus my $17.30 / $9.39 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is $18.85. I am lowest of the three.

MS LSPF of $225 implies a Forecast Low P/E of 24.3: less than the above-stated 30.0. MS LSPF is 19.1% less than the default $9.27/share * 30.0 = $278.10, which results in more conservative zoning. MS LSPF is also 20.1% less than mine.

My TAR (over 15.0% preferred) is much less than the 16.3% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 1.3 and 2.9 per Zacks and my projected P/E, respectively: the latter significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is cheap at 0.6. Kim Butcher’s “quick and dirty DCF” prices the stock at 12.0 * [$18.85 – ($0.00 + $1.25)] = $211.20: overvalued by 48.1%.

NFLX is a BUY under $362. With a forecast high price of $605.50, TAR should meet my 15% criterion around $303/share.