Netflix Inc. (NFLX) Quarterly Valuation – May 2014

200px-Netflix_logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Netflix Inc. (NFLX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Netflix, Inc. is an Internet television network with more than 33 million members in over 40 countries. In the United States, the Company’s subscribers can receive standard definition digital versatile disc (DVDs), and their high definition successor, Blu-ray discs (collectively DVD), delivered quickly to their homes. The Company operates in three segments: Domestic streaming, International streaming and Domestic DVD. Domestic and International streaming segments derive revenues from monthly subscription services consisting solely of streaming content. The Domestic DVD segment derives revenues from monthly subscription services consisting solely of DVD-by-mail.

NFLX Chart

NFLX data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $345.09
MG Value $28.04
MG Opinion Overvalued
Value Based on 3% Growth $32.24
Value Based on 0% Growth $18.90
Market Implied Growth Rate 73.36%
Net Current Asset Value (NCAV) -$16.40
PEmg 155.21
Current Ratio 1.58
PB Ratio 13.99

Balance Sheet – 3/31/2014

Current Assets $3,586,800,000
Current Liabilities $2,263,700,000
Total Debt $900,000,000
Total Assets $6,048,100,000
Intangible Assets $2,179,500,000
Total Liabilities $4,569,700,000
Outstanding Shares 59,940,000

Earnings Per Share

2014 (estimate) $2.76
2013 $1.85
2012 $0.29
2011 $4.16
2010 $2.96
2009 $1.98
2008 $1.32
2007 $0.97
2006 $0.71
2005 $0.64
2004 $0.33

Earnings Per Share – ModernGraham

2014 (estimate) $2.22
2013 $2.05
2012 $2.15
2011 $2.81
2010 $1.96
2009 $1.34


Netflix is suitable for Enterprising Investors but not for Defensive Investors.  The Defensive Investor has significant concerns regarding the low current ratio, the lack of dividend payments, and the exceptionally high PEmg and PB ratios.  The Enterprising Investor is willing to accept more risk, though, and is only concerned with the lack of dividend payments.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors.  From a valuation side of things, the company appears to be very significantly overvalued after growing its EPSmg (normalized earnings) from $1.96 in 2010 to only an estimated $2.22 for 2014.  This low level of demonstrated growth is in stark contrast to the market’s implied estimate of 73.36% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is way below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Netflix Inc. (NFLX)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Netflix Inc. (NFLX) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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