Media Entertainment Stocks

Netflix Inc Valuation – March 2019 #NFLX

Company Profile (excerpt from Reuters): Netflix, Inc., incorporated on August 29, 1997, 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.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of NFLX – March 2019

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 $156,739,041,000 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.49 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 616.45% Pass
6. Moderate PEmg Ratio PEmg < 20 159.11 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 30.93 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 1.49 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.23 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 $2.26
MG Growth Estimate 15.00%
MG Value $86.91
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $32.73
MG Value based on 0% Growth $19.19
Market Implied Growth Rate 75.31%
Current Price $359.17
% of Intrinsic Value 413.28%

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 $0.36 in 2015 to an estimated $2.26 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 75.31% 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 $31.39. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 159.11, which was above the industry average of 35.38. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-24.48.

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) -$24.48
Graham Number $31.39
PEmg 159.11
Current Ratio 1.49
PB Ratio 30.93
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $9,694,135,000
Total Current Liabilities $6,487,320,000
Long-Term Debt $10,360,058,000
Total Assets $25,974,400,000
Intangible Assets $0
Total Liabilities $20,735,635,000
Shares Outstanding (Diluted Average) 451,127,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.65
Dec2018 $2.68
Dec2017 $1.25
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 -$0.05
Dec2001 -$0.77
Dec2000 -$1.47

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.26
Dec2018 $1.39
Dec2017 $0.69
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 -$0.01
Dec2004 -$0.19
Dec2003 -$0.36

Recommended Reading:

Other ModernGraham posts about the company

Netflix Inc Valuation – June 2018 $NFLX
Netflix Inc Valuation – February 2017 $NFLX
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

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Disclaimer:

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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