Netflix Inc Valuation – February 2017 $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 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  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 an Internet television network. The Company operates through three segments: Domestic streaming, International streaming and Domestic DVD. The Domestic streaming segment includes services that streams content to its members in the United States. The International streaming segment includes services that streams content to its members outside the United States. The Domestic DVD segment includes services, such as digital optical disc (DVD)-by-mail. The Company’s members can watch original series, documentaries, feature films, as well as television shows and movies directly on their Internet-connected screen, televisions, computers and mobile devices. It offers its streaming services both domestically and internationally. In the United States, its members can receive DVDs delivered to their homes. The Company had members streaming in over 190 countries, as of December 31, 2016.

NFLX Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of NFLX – February 2017

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 $61,859,419,303 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.25 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 89.94% Pass
6. Moderate PEmg Ratio PEmg < 20 238.49 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 23.45 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 1.25 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.97 Fail
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 Pass

Stage 2: Determination of Intrinsic Value

EPSmg $0.60
MG Growth Estimate 15.00%
MG Value $23.13
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $8.71
MG Value based on 0% Growth $5.11
Market Implied Growth Rate 114.99%
Current Price $143.25
% of Intrinsic Value 619.44%

Netflix, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.29 in 2013 to an estimated $0.6 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 114.99% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Netflix, Inc. revealed the company was trading above its Graham Number of $11.79. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 238.49, which was above the industry average of 158.7. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-11.82.

Netflix, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$11.82
Graham Number $11.79
PEmg 238.49
Current Ratio 1.25
PB Ratio 23.45
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0


Useful Links:

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Total Current Assets $5,720,291,000
Total Current Liabilities $4,586,657,000
Long-Term Debt $3,364,311,000
Total Assets $13,586,610,000
Intangible Assets $0
Total Liabilities $10,906,810,000
Shares Outstanding (Diluted Average) 438,652,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $0.99
Dec2016 $0.43
Dec2015 $0.28
Dec2014 $0.62
Dec2013 $0.26
Dec2012 $0.04
Dec2011 $0.59
Dec2010 $0.42
Dec2009 $0.28
Dec2008 $0.19
Dec2007 $0.14
Dec2006 $0.10
Dec2005 $0.09
Dec2004 $0.05
Dec2003 $0.01
Dec2002 -$0.11
Dec2001 -$1.53
Dec2000 -$2.94

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.60
Dec2016 $0.38
Dec2015 $0.36
Dec2014 $0.39
Dec2013 $0.29
Dec2012 $0.31
Dec2011 $0.40
Dec2010 $0.28
Dec2009 $0.19
Dec2008 $0.14
Dec2007 $0.10
Dec2006 $0.06
Dec2005 -$0.07
Dec2004 -$0.40
Dec2003 -$0.72
Dec2002 -$1.03
Dec2001 -$1.30

Recommended Reading:

Other ModernGraham posts about the company

5 Speculative and Overvalued Companies to Avoid – November 2015
Netflix Inc Valuation – November 2015 Update $NFLX
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

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Netflix Inc Valuation – November 2015 Update $NFLX
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Ebay Inc. Analysis – August 2015 Update $EBAY
Facebook Stock Analysis – Quarterly Update May 2015 $FB
eBay Inc. Quarterly Valuation – May 2015 $EBAY


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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