This Netflix stock forecast article was written by Viktoriya Voronchuk – Financial Analyst intern I Know First.

Highlights:

• Netflix & Competitors: earnings growth exceeded the Entertainment industry by 52.6%
• Since the beginning of 2020, the company’s share has risen by 47%
• DCF Supports a $652.82 NFLX Stock Forecast for 2021

Overview

Netflix, Inc. provides a subscription streaming entertainment service. It offers TV series, documentaries, and feature films across various genres and languages. The company provides members the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. It also provides DVDs-by-mail membership services. The company has approximately 195 million paid members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California. The Netflix stock prediction from April 2020 to January 2021 provided investors with returns of 39.47%.

Over 25 Million New Subscribers Due To COVID-19 & Big Bets On Asia Markets

COVID-19 has had a significant impact on many people’s lifestyles and daily routines worldwide. The lockdown measures have resulted in a 39% rise in TV and streaming services consumption by the end of 2020. The pandemic has proven to be a thriving time for the media sector. 

Netflix has attracted over 25 million subscribers in the first six months of the year, the number of new users it has not gained in the past five years. The number of international clients in the third quarter grew by 34% compared to the same period last year. Furthermore, even in the much more mature North American market, the number of paid subscribers has risen by 9%.

Netflix is ​​betting big on the Asia Pacific region by investing millions of dollars in original and licensed content. Nearly half of the Netflix revenue for the third quarter of 2020 was accounted for due to its Asia-Pacific paid membership. The Asia Pacific region’s subscriber base is projected to grow at a CAGR of 18.47% by 2023, making it the fastest-growing region in the world.

Asia Pacific region is a lucrative market for companies due to its large population. According to EY, India has the second-largest number of Internet users after China, with about 570 million Internet subscribers and an annual growth rate of 13%. By 2025, Southeast Asia’s internet economy will grow to $300 billion.

So, COVID-19 turned out to be beneficial for Netflix’s shares, bringing over 25 million new subscribers. The company has tremendous global growth opportunities, sees growing demand from so many currently locked-at-home consumers worldwide. There are about 1.7 billion global households outside of China today. At a conservative 0.9% annual population growth rate, that should be closer to 1.9 billion in 10 years. If 60% of those households have broadband or other high-speed internet access by then, that will be over 1.1 billion households that can theoretically subscribe to Netflix.

Netflix is optimistic about the opportunities Asia presents. Japan, South Korea, India, Indonesia are the markets where the company sees significant potential and will continue to invest in this region’s development content. This allows me to stay in a buying position.

Netflix & Competitors: Earnings Growth Exceeded The Entertainment Industry By 52.6%

Netflix, Walt Disney, Sony are large-cap entertainment companies, but which is the better business? For that, we should compare Netflix with competitors based on their earnings, valuation, and profitability. 

ROE and ROA are important components for measuring company performance. With the help of ROE, we can measure how much a company is earning with respect to the amount of equity that is put in the business. In contrast, ROA tells us how much profit is being generated by the company with the total amount of assets invested in the business. Good news for investors: The company outperforms its competitors in all respects – the biggest difference is in ROE and net margins. The ROE is greater by 20.46% than Sony and is greater by 27.43% than Walt Disney. As for the Net Margins, it is greater by 8.65% than Sony and is greater by 16.16% than Walt Disney. High net margins show that Netflix can effectively control its costs and provide services at a price significantly higher than its costs. 

It is also worth looking at competitors, like Amazon and Hulu. According to www.businessofapps.com, 85% of Americans spend money on digital video services on Netflix.  Amazon is followed by 65% of users, Hulu – 52% of users.

Take a look at the figure below to see what Netflix indicators in comparison to the industry. According to Figure 4, NFLX’s earnings have grown significantly by 53.6% per year over the past 5 years. Thus, NFLX’s earnings growth over the past year exceeds its 5-year average by 44.2%. Moreover, NFLX’s earnings growth over the past year exceeded the Entertainment industry by 52.6%.

The company’s business dynamics and upside potential for ROE, ROA, and Net Margins suggest a good chance that the stock will be lucrative in the long term. All things considered above allows me to stay in a buying position.

Spendings Above $17.8 Billion In 2020 On Original Content Payoff

Netflix has taken a commanding lead in the streaming video market and investors have bid up the company’s shares as a result. Since the beginning of 2020, the company’s share has risen by 47%. If we look at Figure 5, we can see that the short-term moving average crosses above the long-term moving average, indicating a buy signal (golden cross).

NFLX’s short term assets exceed its short-term liabilities by $1.9B. NFLX’s short term assets do not cover its long-term liabilities by $10.5B. This can pick up investor’s ears.

Netflix’s debt-to-equity ratio has been growing since 2015, reaching 1.81 in the first quarter of 2019. Is it bad? The main duty of a company is the ability to access money that you otherwise would not have been able to invest in something and get more on the other end than you could get in a world without debt. Strategic debt collection, in the long term, is a powerful tool.

The financial indicators show that Netflix is using its capital effectively. Netflix has increased its ROI since 2017. If compared to the competitors (see above), Netflix’s ROE and ROA also perform well to measure a company’s long-term health. Netflix prefers to fund its business with increased debt to optimize its cost of capital. Many companies do not know how to use this strategy, which shows the ability of Netflix to calculate its capital cost.

It can be concluded that Netflix is in debt because it is spending so much money on original content, something like $17.8 billion in 2020, but it is not going bankrupt. Netflix can effectively control its costs and provide services at a price significantly higher than its costs. I think NFLX ‘s stock is a good long-term investment.

DCF Supports $ 653 Netflix Stock Forecast For 2021

The forecast is based on average data from previous years, the direction of the company’s policy, and the specifics of the development of this sector of the economy for the coming years. The increase of D&A for the next years was primarily estimated due to future capital projects placed into the content production.  Content creation expenditures will grow from $15 billion in 2020 to $23 billion in 2025 and grow 3% every year after that, becoming 36% of revenues in the terminal year. Future cash flows are projected based on historical data combined with a forecast for the next 4 years.

The DCF analysis results show that NFLX’s stock target price should be around $653.  This projected share price makes $142.42 more difference from the current share price.

Conclusion:

I take the buy-side on NFLX’s stock because stock holds buy signals from long-term moving averages giving a positive forecast. NFLX shares are up more than 49% since the beginning of 2020. NFLX’s earnings growth over the past year exceeded the Entertainment industry by 52.6%. For as long as the pandemic lasts, Netflix will dominate the film industry, releasing more movies-with more stars-than many of its rivals combined. Therefore, I consider it a good choice at these current levels for long-term investments, and according to the DCF analysis results, NFLX’s stock target price should be $142.42 more and will be around $653.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the Netflix stock prediction. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success With Netflix Stock Forecast

I Know First has been bullish on Netflix stock forecast in the past. On February 13, 2020, the I Know First algorithm predicted a bullish forecast for Netflix stock price. The forecast on 11 months time horizon provided investors with returns of 33.63%. See the chart below.

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Please note-for trading decisions use the most recent forecast.