A Thorough Netflix Stock Analysis (NFLX) | Quantifying Subscription and Ad Success
Unveiling Netflix's Earnings: Navigating Strong Reports Amid Revenue Miss
Disclaimer: The analysis is for informational purposes only and does not constitute investment advice. Consult a licensed financial professional before making investment decisions.
Overview of the Business
Netflix is a company that provides streaming services. Their services are used in over 190 countries by approximately 230 million people. Netflix's platform also allows users to stream content on various devices, from smartphones and tablets to smart TVs and gaming consoles. They have 4 subscription plans for people to watch and enjoy TV series, films, and games. They include:
Basic with Ads - $7 per month
Basic - $10 per month
Standard - $15.50 per month
Premium - $20 per month
The company operates as one operating segment and gets most of its revenue from monthly membership fees.
Qualitative Analysis
Company Strategy
Netflix has two parts to its company strategy: The technical (software) part and the entertainment (Netflix Originals) part.
Software Strategy
Netflix is a SaaS company and uses the DHM framework. A DHM model stands for Delight, Hard-to-Copy, Monetize. This framework is for giving users a good experience in difficult-to-replicate ways.
Netflix uses complex programs and data analysis to understand what viewers like to watch and what they enjoy most. They use this information to decide what shows and movies to make and suggest things for users to watch to have a personalized and exciting experience when using their service.
Entertainment Strategy
Netflix also creates many of its own, original movies and TV series. These Netflix Originals will be available only on Netflix first allowing for rapid and primary distribution. And since Netflix owns the IP of these movies, it can distribute them and license them to other streaming services. This allows them to make money from distributing its content. Another thing they can do with the IP is create consumer goods about these movies.
SWOT Analysis
Porter’s 5 Forces
Economic Moat
Differentiation: Netflix has high-quality shows, movies, and Netflix Originals but for a higher price.
High Switching Costs: Even though there aren’t many other rivals to Netflix, it is very easy to switch subscriptions after a month.
Brand Recognition: Netflix is the leading streaming service and is very popular. They have a very good reputable brand name.
Complex Replication: Re-creating Netflix’s work is not a simple task and is even more difficult to do it at the same level of quality as Netflix when it comes to their shows and movies.
Government Protection: Netflix doesn’t have any special government protection and isn’t a monopoly.
Economics of Scale: Scaling is difficult for Netflix as there are a limited amount of people that can purchase the subscription and maximizing that is even more difficult. They need to make sure they don’t lose any subscribers and gain back any they have lost.
Fundamental Analysis
Important Ratios
Valuation
The average P/E ratio in the entertainment industry is 52.32. Comparing that to Netflix’s P/E ratio of 48.44, we can see that the stock is relatively cheap and could be undervalued.
The P/S ratio can be quite useful in this case, especially since Netflix recently had a losing earnings report. Generally, a P/S ratio between 1.0 to 2.0 is good and anything less than 1.0 is exceptional. The industry average is 3.54 and Netflix’s P/S ratio is 5.72 which indicates that investors have high expectations for this stock.
Another useful valuation ratio for Netflix is the price-to-book ratio. Generally, a price-to-book ratio between 1.0-3.0 is good and if it is less than 1.0, it is excellent. However, it is important to compare it to the industry average as it can provide more information. The entertainment industry’s average price-to-book ratio is 3.80. If we compare that to Netflix’s price-to-book ratio of 8.09, we can see that investors think Netlfix’s assets and financial positions are strong. However, it still is quite high and can mean that the stock is overvalued and that investors have high expectations. It could also mean that the company has a very strong brand name.
Profitability
The ROA is an important ratio to use and understand as it gives us investors an idea of how well a company’s investments are doing. Generally, an ROA above 5% is considered good but the higher, the better. Netflix’s ROA is 8.60% which shows us that the company’s assets are effective.
The ROE provides an insight into the business's profitability for owners and investors. The average for the software entertainment industry is 17.42% while Netflix’s is 19.80%. This suggests that Netflix is performing better in generating profits from the money invested by its shareholders.
The last profitability ratio is the gross profit margin. The industry average is 41.94% while Netflix’s gross profit margin is 38.80%. While this is relatively good, it is lower than the industry norm and could mean that content production is more expensive.
Debt
Let’s look at one debt ratio, debt-to-equity. This is an important ratio since it can provide information about the company’s potential to grow. While there are many other factors to look at when analyzing the debt-to-equity ratio, we want something between 0.3 to 0.6. From a pure risk perspective, anything less than 0.4 is considered good and anything that is 0.6 or more is considered risky. The industry average is 5.06% or 0.506 (round to 0.51) and Netflix’s D/E ratio is 0.63. We can definitely see that Netflix is a more risky stock in general and when compared to its industry.
Intrinsic Value
To find the intrinsic value of Netflix, we will use Benjamin Graham’s formula:
As of the most recent quarter, EPS is 8.59
The Risk-Free Rate (AAA Corp. Bond Yield) = 4.66
After doing the calculations, the intrinsic value of Netflix is $431.98.
Technical Analysis
Summary
Netflix has a two-pronged strategy that includes both software and entertainment components. The software technique involves extensive data analysis to personalize user experiences and recommend content. Simultaneously, Netflix generates unique Netflix Originals to supplement its entertainment offerings. SWOT analysis, Porter's Five Forces, and Economic Moat assessments highlight Netflix's brand strength, differences, and prospective issues. Despite a somewhat lower gross profit margin than the industry norm, the research reveals good cost management of content production. Netflix's financial health and risk profile are depicted through an examination of valuation ratios, profitability measurements such as ROE and ROA, and debt analysis. The analysis concludes with intrinsic value calculations, providing a full assessment of Netflix's strategic direction and financial state.