A Word On Netflix’s Valuation

Netflix is a stock steeped in controversy. Netflix has been a battleground between the bulls and the bears for as long as I can remember, where both types of investors defend their stance with fire and vigor.

 

To date, so far, the bulls have been handily rewarded.

 

Netflix trades at an incredible 330x earnings, with a forward P/E of an even more astounding 466x (according to Morningstar). That’s right folks, if you thought last year’s earnings were bad, just wait until next year. But still, Netflix stock continues to ascend. So what gives?

 

Netflix stock seems to have totally different valuation metrics than almost any other stock on the NYSE. Netflix investors, simply put, just don’t seem to care much about earnings, with the bulk of the valuation placed on subscriber growth. Hooey, I say. Netflix, a very aggressive tech play, should not be treated any differently in the eyes of an investor than a slow-moving behemoth like Exxon Mobil. Their valuation metrics are completely different and their industries are nothing alike, but at the end of the day, all the investor should care about is return on investment (ROI) – you cannot evaluate the stocks in the same way, but once you arrive at your final valuation, those numbers can be compared absolutely. The truly unbiased investor would be better suited investing in the company with the superior valuation. So how does Netflix actually stack up in terms of value?

 

The Good

Netflix’s revenue growth is a thing of beauty, with revenues growing on average each quarter by nearly 6%.

 

 

QUARTER Revenues (Thousands) Revenue Growth (Quarterly)
1Q2009 $ 394,098 3.66%
2Q2009 $ 408,509 3.58%
3Q2009 $ 423,120 5.06%
4Q2009 $ 444,542 11.05%
1Q2010 $ 493,665 5.30%
2Q2010 $ 519,819 6.43%
3Q2010 $ 553,219 7.72%
4Q2010 $ 595,922 20.58%
1Q2011 $ 718,553 9.75%
2Q2011 $ 788,610 4.21%
3Q2011 $ 821,839 6.54%
4Q2011 $ 875,575 -0.66%
1Q2012 $ 869,791 2.23%
2Q2012 $ 889,163 1.79%
3Q2012 $ 905,089 4.44%
4Q2012 $ 945,239 8.33%
1Q2013 $ 1,023,961 4.43%
2Q2013 $ 1,069,372 3.43%
3Q2013 $ 1,105,999 6.26%
4Q2013 $ 1,175,230 8.07%
1Q2014 $ 1,270,089 5.54%
2Q2014 $ 1,340,407 5.15%
3Q2014 $ 1,409,432 5.34%
4Q2014 $ 1,484,728 5.95%
1Q2015 $ 1,573,129 4.55%
2Q2015 $ 1,644,694 5.69%
3Q2015 $ 1,738,355 5.94%

 

The data above is a thing of beauty.

 

The Bad

Netflix’s liabilities are greatly outpacing their revenues.

 

What was once a debt-free company in 2009 is now holding onto $2.4B in long-term debt. However, the most troubling number on the balance sheet, in my opinion, is the skyrocketing content liabilities.

 

Since 2009, Netflix’s content liabilities have increased 2,490%. From their most recent 10-Q filing, Netflix has nearly $4.6B in total liabilities due in less than 1 year – $2.6B “current content liabilities” and $2.0B “non-current content liabilities.”

 

 

 

 

This is a staggering amount of debt accumulation.

 

The Ugly

The goal of every company, in the end, is to turn a profit. When I tried searching for Netflix’s profit in its content library, it was nowhere to be found.

 

Earnings per share, while once gushing out of Netflix’s coffers, have turned into – to borrow from the great Kevin O’Leary – “a nothing-burger.”

 

Photo credit: RandstadCanada / Foter.com / CC BY

Photo credit: RandstadCanada / Foter.com / CC BY

 

QUARTER EPS (Diluted)
1Q2009 $ .37
2Q2009 $ .54
3Q2009 $ .52
4Q2009 $ .56
1Q2010 $ .59
2Q2010 $ .80
3Q2010 $ .70
4Q2010 $ .87
1Q2011 $ 1.11
2Q2011 $ 1.26
3Q2011 $ 1.16
4Q2011 $ .64
1Q2012 $ (.08)
2Q2012 $ .11
3Q2012 $ .13
4Q2012 $ .13
1Q2013 $ .01
2Q2013 $ .07
3Q2013 $ .07
4Q2013 $ .11
1Q2014 $ .12
2Q2014 $ .16
3Q2014 $ .14
4Q2014 $ .19
1Q2015 $ .05
2Q2015 $ .06
3Q2015 $ .07

 

Conclusion

When it comes to investments, I’m interested in the numbers only. While Netflix has seen its revenue grow by leaps and bounds in the past half a decade, their cost of doing business has increased at a far greater pace. Netflix’s content has become so expensive that the company can’t seem to turn much of a profit, and subscriber growth has shown over and over again it just isn’t significant enough to bridge the gap on volume with such narrow-thin margins.

I can’t help but channel my inner Kevin O’Leary when I think about Netflix as an investment – “How do I make MONEY?” The only way to make money on Netflix stock at the moment is to purchase the stock, hope the market price increases and sell the stock for a capital gain. There are no distributions, so this is a pure growth play. When valued at 330x current earnings and 390x next year’s earnings, where exactly is the upside relative to the downside? What if the market corrects next week and we see a more reasonable forward P/E of 466x placed on Netflix stock? That would drop the value of the stock to $11.10-14.80 per share. I think that is a much more fair value for Netflix stock, and where it should be priced if the market was reasonable in the short-term. At current market prices, it is a valuation nightmare in my opinion.

Netflix has a major problem with expenses. Its cost of doing business is just too high. While there is a chance that one day, Netflix will hammer out these issues and find out how to decrease licensing costs, that day is not today. The stock is priced so ridiculously that I cannot think of a likely scenario where an investor makes money in the long-term. So far, the unlikely scenario has played out – investors have remained so optimistic they have pushed the price of the stock up to dizzying heights despite crashing earnings. But this is a clear example of a bubble in my opinion, and I think it is only a matter of time until the bubble bursts.

All information found herein, including any ideas, opinions, views, predictions, commentaries, forecasts, suggestions or stock picks, expressed or implied, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. I am not a licensed investment adviser.

Anthony

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