Netflix Inc. Quarterly Valuation – August 2014 $NFLX

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 the 5 Undervalued Companies for the Defensive 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 44 million members in over 40 countries. Its members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Additionally, in the United States (U.S.), its members can receive digital versatile discs (DVDs) delivered quickly to their homes. The Company has three operating segments: Domestic streaming, International streaming and Domestic DVD. The Domestic and International streaming segments derive revenues from monthly membership fees for services consisting solely of streaming content. The Domestic DVD segment derives revenues from monthly membership fees for services consisting solely of DVD-by-mail. The Company focuses grow its streaming subscription business domestically and internationally.
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 $459.09
MG Value $39.06
MG Opinion Overvalued
Value Based on 3% Growth $35.43
Value Based on 0% Growth $20.77
Market Implied Growth Rate 89.70%
Net Current Asset Value (NCAV) -$17.44
PEmg 187.89
Current Ratio 1.57
PB Ratio 17.14

Balance Sheet – 6/30/2014

Current Assets $3,668,400,000
Current Liabilities $2,335,100,000
Total Debt $900,000,000
Total Assets $6,325,800,000
Intangible Assets $2,348,800,000
Total Liabilities $4,716,100,000
Outstanding Shares 60,090,000

Earnings Per Share

2014 (estimate) $3.42
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) $2.44
2013 $2.05
2012 $2.15
2011 $2.81
2010 $1.96
2009 $1.34

Dividend History

Netflix does not pay a dividend.


Netflix is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns regarding the low current ratio, lack of dividend payments, and the high PEmg and PB ratios.  The Enterprising Investor’s only initial concern is 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 research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.96 in 2010 to an estimated $2.44 for 2014.  This level of demonstrated growth does not support the market’s extremely high implied estimate of 89.70% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

Be sure to check out the previous ModernGraham valuations of Netflix Inc. (NFLX) for more perspective!

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.

Disclaimer:  The author did not hold a position in Netflix Inc. (NFLX) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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