Financial Ratio Analysis

"The key takeaway from our analysis, which relates to the rationale for our upgrade of Netflix's financial ratios, is that Netflix has a strong balance sheet and solid liquidity profile with no significant near-term debt maturities," Johnson continued.

Read More: Daniel H. Cole

Key Takeaways

Netflix shares continue to trade at a trailing twelve-month (TTM) P/E ratio of 350, which is twice the S&P 500 average of 29. Furthermore, the company has an average of 31 million members in its global content library, compared to 72 million U.S. subscribers. With the international expansion moving forward, Netflix could become a dominant global player in content delivery.

Valuation Analysis

Netflix's current P/E ratio of 35.7x is 25% higher than its 5-year average P/E of 23.3x. Since its IPO in 1997, Netflix has produced compounded annual revenue growth of 59%. The global media and entertainment industry is expected to grow to $3.7 trillion by 2021 and to $7.2 trillion by 2025.

If Netflix's average revenue growth of 57% continues over the next 10 years and the company achieves worldwide penetration rates of 25% of the adult U.S. population by 2025, Netflix would have a global cumulative reach of almost 2 billion subscribers in 2025. Considering Netflix is currently available in 47 countries, the industry penetration rate of 2% would generate about $142 billion in revenue for Netflix by 2025, up from $41 billion in 2017.

Based on our financial model, Netflix's consensus analyst EPS estimate of $6.29 in 2018 is conservative and assumes Netflix will be able to achieve 50% international penetration over the next 10 years. This estimate also assumes a modest 10% EPS growth rate in the United States. If Netflix were able to achieve an average revenue growth rate of 24% per year in the United States and achieve a 60% worldwide penetration rate by 2025, the consensus 2018 EPS estimate would jump to $12.44. This conservative financial model implies the company would be trading at 20x 2018 revenue and 32x 2018 EPS. This is based on Netflix's current stock price of $323.40, which is lower than its 52-week high of $398.64 and $328.74 (at June 25, 2018, and July 11, 2018, respectively).

With Netflix's current earnings, debt, and equity levels, the company is undervalued. We now expect Netflix to be trading at a much lower P/E multiple over the next five years. The company could be traded at a significantly higher P/E multiple over the next five years if it were to achieve its accelerated international penetration goals, which would drive EPS growth to a rate that is significantly higher than the financial model assumes. We project that the stock could be trading at a P/E multiple of 40x forward EPS by 2021 (four years out) and achieve a stock price of $936 by 2022.

In addition, investors could benefit from a more attractive yield relative to its historical average. Since the initial public offering, the company's dividend yield has hovered between 1.1% and 1.8% until its most recent increase in August 2017. Currently, the current yield is 1.4%. Given the historical volatility of the stock, the current P/E and dividend yield should be considered when assessing the stock's valuation.

Read More: Daniel H. Cole

https://danielcole2.blogspot.com/2022/11/what-everyone-investing-in-stock-market.html

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