NFLX Stock Forecast: Navigating Growth, Valuation, and Industry Dynamics in the Streaming Era

Zheman ZhongThis NFLX Stock Forecast analysis article was written by Zheman Zhong – Financial Analyst at I Know First.

Highlights

  • Netflix maintains a dominant position in the global streaming market with over 238 million subscribers and significant potential for expansion, particularly in Asia.
  • Financial analysis shows a healthy profit margin and robust revenue streams, primarily from streaming services, with a notable growth in screen time share from 6% to 8.2% between May 2021 and June 2023.
  • Strategic content development and affordable pricing models position Netflix for sustained growth despite increasing competition and market saturation in North America.
  • Market valuation metrics suggest Netflix may be undervalued compared to peers, indicating a potential investment opportunity given its strong operational performance and expansive content library.
(Source: commons.wikimedia.org)

Overview

Netflix is a leading American subscription-based streaming service, renowned for offering a wide array of original and licensed films, television shows, documentaries, and mobile games across various genres. Established in 2007 as an evolution of its DVD-by-mail movie rental service founded nearly a decade earlier, Netflix has grown into the most-subscribed video on demand platform globally. As of October 2023, it boasts over 238 million paid memberships across more than 190 countries, making it a dominant force in the streaming media industry. Notably, half of its U.S. library consists of “Netflix Original” productions, and the company has expanded its offerings to include video game publishing. Ranked as the 24th most-visited website worldwide, Netflix’s success is attributed to its focus on on-demand content and its recent foray into ad-supported subscription plans.

Netflix’s business model is straightforward yet highly effective, centered solely around its streaming service. It has the largest subscriber base in the television entertainment sector both in the U.S. and internationally, with nearly 250 million subscribers worldwide. Excluding China, Netflix’s reach spans almost the entire global population. The company has historically shunned live programming and sports, concentrating instead on episodic TV, movies, and documentaries. This approach, coupled with its commitment to providing a diverse range of content in over 30 languages, underscores its mission to entertain audiences globally. Netflix prides itself on being a major fan and facilitator of entertainment, constantly striving to connect its members with their next favorite story.

NFLX Stock Forecast: Positioning for Growth Amid a Dynamic Streaming Landscape

The video streaming industry is not a zero-sum game and there is ample space for multiple players to thrive. While North America might be approaching market saturation, limiting subscriber growth, there is significant potential for expansion in Asia and other regions with lower market penetration. Netflix’s strategy of developing local content, exemplified by hits like South Korea’s “Squid Games,” positions it well to capitalize on these markets. Additionally, affordable pricing tiers could further spur subscriber growth in these regions. The industry is also witnessing a trend of consolidation, with platforms like Netflix, which boasts substantial subscriber numbers and robust revenues, achieving the scale economies necessary for profitable streaming operations. This contrasts with smaller platforms, which struggle to achieve profitability and may look to license their content to larger entities like Netflix, potentially giving Netflix more leverage in content negotiations and the ability to offer a broader range of content to its users.

As streaming continues to capture a larger share of total viewing time, surpassing cable and broadcasting, the decline of traditional pay TV (“cord-cutting”) presents a tailwind for the industry, especially for services like Netflix that offer comprehensive on-demand libraries and better value. The practice of “consumer science” and the focus on customer delight can build a long-term competitive advantage. Companies that prioritize customer satisfaction tend to develop loyal user bases and create economic moats, whereas those that do not may see their competitive edge and revenues diminish over time. Netflix’s commitment to customer satisfaction, along with its scale and content strategy, positions it well to benefit from these industry dynamics and the ongoing shift towards streaming as a primary mode of content consumption.

In May 2021, Netflix commanded a 6% share, comparable to YouTube and ahead of other streaming services like Hulu, Amazon Prime Video, and Disney+. By June 2023, Netflix’s share of screen time increased to 8.2%, indicating growth in viewer engagement amidst intensifying competition. The chart also reflects a substantial increase in the total streaming category, from 25% to 37.7% of total TV screen time, underscoring the shifting consumer preference towards streaming services over traditional broadcast and cable. This trend highlights the continued rise of streaming as a dominant form of media consumption and suggests that Netflix, while facing increased competition, remains a significant player in the market.

Figure 1: Streaming Industry Overview
(Source: simplywall.st)

Netflix’s Stock Trajectory: Peaks, Valleys, and the Quest for Recovery

For the past five years, NFLX’s stock reflects significant volatility. Initially, the stock shows an upward trend until early 2021, signifying investor confidence and potentially a response to increased demand for streaming services. However, there is a notable decline in the stock price starting in 2021, which could be attributed to a variety of factors such as market saturation, increased competition, or operational challenges. This decline represents a period of investor skepticism or adverse market conditions impacting Netflix’s valuation. Subsequently, the stock appears to recover somewhat, suggesting a possible return to growth or positive market sentiment. As of the latest data point, the stock price has not fully recovered to its peak levels, indicating that while the company may be regaining some ground, it has yet to overcome the factors contributing to the earlier decline. This could suggest a cautious optimism among investors about the company’s future performance.

Historical NFLX Stock Price 
Figure 2: Historical NFLX Stock Price 
(Source: gurufocus.com)

NFLX Stock Forecast: Analyzing Revenue Streams and Market Dynamics

Netflix’s income statement depicts the company’s financial performance as of December 28, 2022. Netflix’s revenue is overwhelmingly generated from its streaming services, amounting to $31.5 billion, which constitutes 99.5% of its total revenue of $31.6 billion. The remaining 0.5% comes from DVD revenues at $145.7 million. The gross profit stands at $12.4 billion, indicating a gross margin of 39.4%, after accounting for the cost of goods sold (COGS), which is $19.2 billion or 60.6% of the revenue. Operating expenses, including sales, general and administrative (SG&A) costs at $4.1 billion (13%), and research and development (R&D) expenses at $2.7 billion (8.6%), total $6.8 billion (21.6%). These expenses lead to an operating income of $5.6 billion, making up 17.8% of the revenue. After considering net interest expenses of -$368.9 million and taxes of $772 million, the net income is reported at $4.5 billion, which is 14.2% of the revenue, reflecting a healthy profit margin for the company. The tax rate implied by these figures is 14.67%. The flow of the graphic illustrates how revenue gets reduced by various costs and expenses before yielding the final net income.

NFLX  Income Statement Breakdown as of 2022-12-28
Figure 3: NFLX  Income Statement Breakdown as of 2022-12-28
(Source: gurufocus)

The growth grade by Seeking Alpha details Netflix’s revenue growth performance relative to its sector. For the year-over-year (YoY) revenue growth, Netflix has achieved a 4.03% increase, which is marked with a grade of C+ and is significantly higher than the sector median of 2.62%, showing a 53.87% better performance compared to its sector. However, when compared to Netflix’s own 5-year average growth rate of 20.28%, this current YoY growth represents a substantial decrease of 80.11%. Looking at the forward (FWD) revenue growth, Netflix is anticipated to see an 8.79% increase, earning a B grade and outperforming the sector median of 3.22% by a striking 173.27%. This forward growth is also lower than Netflix’s 5-year average of 18.65%, down by 52.89%. These figures suggest that while Netflix is growing at a rate above the median for its sector, its growth rate is decelerating when viewed against its own historical performance.

NFLX Growth Grade
Figure 4: NFLX Growth Grade
(Source: Seeking Alpha)

According to the annual revenue and growth rate for Netflix, Inc. from 2018 through to the trailing twelve months (TTM). Over these years, Netflix’s revenue has shown a consistent upward trend, indicating solid growth in absolute financial terms. However, the growth rate, indicated by the orange line, exhibits a declining trend. Initially, the growth rate appears to have been quite high, but it has been falling steadily, suggesting that while the company continues to increase its revenue, it is doing so at a slower pace each year. The data for TTM indicates that the revenue is still increasing, yet the decline in growth rate could point to various challenges such as market saturation, increased competition, or a maturing business model. This deceleration in growth rate is a critical area for financial analysis, as it might impact future revenue projections and valuation metrics.

Netflix Inc. Annual Revenue
Figure 5: Netflix Inc. Annual Revenue
(Source: Seeking Alpha)

NFLX Stock Forecast: Netflix’s Financial Mastery is Outperforming the Industry

Netflix Inc. (NFLX) exhibits a financial standing that significantly outshines its industry peers, as depicted by a range of profitability and operational efficiency metrics. A deep dive into the company’s performance over the past decade underscores its exceptional consistency in profitability. With ten years of sustained profits, Netflix has not only eclipsed the industry median of six years but has done so to a degree that places it in a better position than 99.9% of companies in the Movies and Entertainment Industry.

A glance at Netflix’s operating margin reveals a figure of 18.35%, dwarfing the industry median of 3.46%. This substantial difference highlights Netflix’s remarkable operational efficiency and control over costs, factors that contribute to its ranking above 89.07% of the industry. The company’s adeptness in generating earnings from its assets is further reflected in its Return on Assets (ROA), which at 9.2% far exceeds the industry median of 0.73%, placing Netflix ahead of 87.95% of its peers.

The Return on Equity (ROE) of Netflix is equally impressive. At 20.94%, it starkly contrasts with the industry median of 2.44%, signifying not only its prowess in yielding profits from shareholders’ investments but also its position as a leader, outperforming 86.86% of the industry. This trend continues with Netflix’s net margin, which stands at 13.82%—a figure much higher than the industry’s 1.4%. Such a net margin indicates an effective conversion of revenue into profit, a feat better than 86.42% of its peers.

When it comes to the utilization of invested capital, Netflix’s Return on Invested Capital (ROIC) is noteworthy. At 11.87%, it significantly surpasses the industry median of 1.94%, reflecting the company’s efficiency in using its capital to generate profits, a performance better than 81.55% of the industry.

However, when we turn to gross margins, Netflix’s lead narrows slightly. Its gross margin of 39.49% is just above the industry median of 38.77%, indicating a slight edge in controlling the cost of goods sold. Although this lead is not as pronounced as in other metrics, it still places Netflix ahead of 51.45% of its competitors.

In essence, the financial metrics paint a picture of Netflix as a company with a solid operational model and an exceptional ability to generate profit. Its performance suggests not just leadership but dominance in key areas of financial health within its industry, marking it as a company with high operational efficacy and robust cost management capabilities. Investors and analysts examining these metrics would likely see a company that stands out for its strong ability to generate and sustain profits.

 Netflix Inc(NFLX) vs Movies and Entertainment Industry Profitability Metrics
Figure 6:  Netflix Inc(NFLX) vs Movies and Entertainment Industry Profitability Metrics
(Data Source: gurufocus)

NFLX Stock Forecast: Netflix’s Market Valuation Through A Peer Comparison Perspective

Netflix Inc. (NFLX) shows a distinctive set of valuation metrics when compared with its industry peers, shedding light on its market position and investor expectations. The P/E (GAAP TTM) ratio for Netflix stands at 45.28, which is lower than the industry average of 56.61, suggesting that Netflix is potentially undervalued by the market in terms of its earnings.

The P/B (TTM) ratio for Netflix is 8.98, which is substantially below the peer average of 32.83. This indicates that Netflix’s assets may be undervalued by the market, especially when compared to a peer like Live Nation Entertainment (LYV), which has a P/B ratio of 87.69.

In terms of sales, Netflix’s P/S (TTM) ratio is 6.15, which is significantly higher than the average of 1.85. This could suggest that the market has high expectations for Netflix’s revenue growth, pricing its sales at a premium compared to its peers.

For the cash flow measure, Netflix’s P/CF (TTM) ratio is 32.80, below the average of 46.03, which may imply that the market views Netflix’s cash flow generation as less robust compared to its peers.

When recalculating the value of Netflix based on the average ratios of its peers, there is an evident discrepancy; the NFLX value projection based on peers’ ratios suggests a substantial increase to 567.30 for P/E, 1658.80 for P/B, 136.35 for P/S, and 636.79 for P/CF. Based on the provided financial ratios, the projection of NFLX stock price is between $136.35 and $1658.80. Setting a target at $749.81(Average of the NFLX Values Based On Peers’ Ratios), it is significantly higher than its recent price of $453.76 as of December 8th, 2023.This reevaluation could indicate that the market currently underestimates the true valuation of Netflix, potentially offering an attractive investment opportunity if the market adjusts these valuations upward to reflect the company’s actual performance and prospects.

NFLX Vs Peers Valuation Metrics on December 08th, 2023
*The average calculated based on NFLX’s peers
Figure 7: NFLX Vs Peers Valuation Metrics on December 08th, 2023
(Source: Seeking Alpha)

Considering the valuation gap between Netflix and its peers, investors should take into account the potential for market correction. While Netflix’s current valuation may seem high, especially in terms of its P/S ratio, the recalculated peer-based valuation suggests room for growth. Investors should closely monitor how Netflix’s strategic initiatives, content library expansion, and subscriber growth trends could influence these valuation metrics in the future.

Conclusion

In conclusion, Netflix’s financials and market position reveal a company that has deftly navigated the competitive streaming landscape to become a leading entertainment provider with a global subscriber base. Despite facing challenges such as market saturation in North America and the accompanying deceleration in growth rates, Netflix has effectively leveraged its original content and strategic pricing to tap into new international markets. The company’s robust revenue streams, significant operating income, and healthy profit margins underscore its financial strength and operational efficiency. With the industry trending towards consolidation and the growing preference for streaming over traditional television, Netflix stands out as a well-positioned contender poised to capitalize on these shifts. The financial metrics and market valuation analysis further highlight Netflix’s potential for growth and suggest that it may be undervalued relative to its peers, presenting a potentially attractive proposition for investors looking at long-term value in a dynamic and evolving industry.

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 NFLX stock forecast. 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 NFLX Stock Forecast

I Know First has been bullish on the NFLX stock forecast in the past. On November 30, 2022 the I Know First algorithm issued a forecast for NFLX stock price and recommended NFLX as one of the bestMega Cap stocks to buy. The AI-driven NFLX stock prediction was successful on a 1-year time horizon resulting in more than 68.70%.

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