Netflix Inc Valuation – November 2015 Update $NFLX

Benjamin 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 10 Most Undervalued Companies for the Defensive Investor – November 2015.  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 stock analysis showing a specific look at how Netflix Inc (NFLX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Netflix, Inc. is a provider of Internet television network. The Company has over 57 million streaming members in over 50 countries. Its members can watch more than two billion hours of television (TV) shows and movies per month, including original series, documentaries and feature films on Internet-connected screen. 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 of streaming content. The Domestic DVD segment derives revenues from monthly membership fees for services consisting of DVD-by-mail. Its members can play, pause and resume watching, all without commercials or commitments. Additionally, in the United States, its members can receive DVDs to their homes. The Company offers streaming service both domestically and internationally.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of NFLX – November 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $46,083,566,493 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.67 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 150.58% Pass
6. Moderate PEmg Ratio PEmg < 20 329.69 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 21.77 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.67 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.08 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

NFLX value Chart November 2015

EPSmg $0.33
MG Growth Estimate -2.79%
MG Value $0.95
Opinion Overvalued
MG Value based on 3% Growth $4.74
MG Value based on 0% Growth $2.78
Market Implied Growth Rate 160.59%
Current Price $107.83
% of Intrinsic Value 11305.95%

Netflix Inc. does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned by the low current ratio, lack of dividends, and high PEmg and PB ratios.  The Enterprising Investor has concerns with the lack of dividends and lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $0.40 in 2011 to an estimated $0.33 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 160.59% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the 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.

Stage 3: Information for Further Research

NFLX Charts November 2015

Net Current Asset Value (NCAV) -$4.98
Graham Number $4.70
PEmg 329.69
Current Ratio 1.67
PB Ratio 21.77
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0



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Most Recent Balance Sheet Figures

Total Current Assets $5,569,713,000
Total Current Liabilities $3,341,418,000
Long-Term Debt $2,400,000,000
Total Assets $9,916,267,000
Intangible Assets $3,891,790,000
Total Liabilities $7,748,949,000
Shares Outstanding (Diluted Average) 437,606,000

Earnings Per Share History

Next Fiscal Year Estimate $0.19
Dec14 $0.62
Dec13 $0.26
Dec12 $0.04
Dec11 $0.59
Dec10 $0.42
Dec09 $0.28
Dec08 $0.19
Dec07 $0.14
Dec06 $0.10
Dec05 $0.09
Dec04 $0.05
Dec03 $0.01
Dec02 -$0.11
Dec01 -$1.53
Dec00 -$2.94

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $0.33
Dec14 $0.39
Dec13 $0.29
Dec12 $0.31
Dec11 $0.40
Dec10 $0.28
Dec09 $0.19
Dec08 $0.14
Dec07 $0.10
Dec06 $0.06
Dec05 -$0.07
Dec04 -$0.40
Dec03 -$0.72
Dec02 -$1.03
Dec01 -$1.30
Dec00 -$0.98

Recommended Reading:

Other ModernGraham posts about the company

5 Speculative and Overvalued Companies to Avoid – November 2014
26 Companies in the Spotlight This Week – 11/22/14
Netflix Inc. Annual Valuation – 2014 $NFLX
What is the PEmg Ratio? This Week on the ModernGraham Show
19 Companies to Research This Week – 8/23/14

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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