Netflix Stock Is Down (And The Worst Is Yet To Come)
Netflix stock analysis (July 2023)
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6 million additional subs is encouraging when you consider that Disney Plus lost 4 million in the same quarter. And Netflix continues to publish some of the highest engaging programs. According to Nielsen, Netflix had the top original streaming series in the US for 24 of the first 25 weeks of the year, and the top movie for 21 weeks.
But subscriber growth last quarter was mostly due to the company’s crackdown on password sharing. Average revenue per membership actually declined across the board. And once the rollout of paid sharing is complete, the big question is what is going to drive future growth?
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6 million additional subs is encouraging when you consider that Disney Plus lost 4 million in the same quarter. And Netflix continues to publish some of the highest engaging programs. According to Nielsen, Netflix had the top original streaming series in the US for 24 of the first 25 weeks of the year, and the top movie for 21 weeks.
But subscriber growth last quarter was mostly due to the company’s crackdown on password sharing. Average revenue per membership actually declined across the board. And once the rollout of paid sharing is complete, the big question is what is going to drive future growth?
#netflixstock #investing #overlookedalpha
Transcript
00:00 Netflix released earnings last week and the stock has fallen roughly 10% since. Right
00:05 now the company has a market cap of $193 billion, it's got $8.6 billion of cash and investments
00:12 and $14 billion of long term debt so the enterprise value is $198 billion.
00:18 Revenue over the last 12 months is $32 billion, net income is $4.3 billion and free cash flow
00:23 is roughly the same. That means Netflix stock is valued at 6.2 times revenue, 47 times earnings
00:29 and 47 times free cash flow. In its latest earnings report, Netflix revealed
00:34 an additional 6 million subscribers, taking the total to 238 million. That puts Netflix
00:41 above Disney+ at 158 million and Amazon Prime which is estimated at 200 million.
00:47 Quarterly revenue was up 2.7% to $8.2 billion and management thinks free cash flow for the
00:53 year will come in at around $5 billion. According to the shareholder letter, this increase in
00:58 free cash flow reflects lower content spend and that's partly in response to the writer
01:03 strikes going on in Hollywood. 6 million additional subs is encouraging when
01:07 you consider that Disney+ lost 4 million in the same quarter and Netflix continues to
01:13 publish some of the highest engaging programs. According to Nielsen, Netflix had the top
01:18 original streaming series in the US for 24 of the first 25 weeks of the year and the
01:24 top movie for 21 weeks. But subscriber growth last quarter was mostly
01:29 due to the companies crackdown on password sharing. Average revenue per membership actually
01:35 declined across the board. And once the rollout of paid sharing is complete, the big question
01:40 is what is going to drive future growth. Because current growth projections don't look
01:45 strong enough. If you assume that Netflix grows revenue 10% a year for the next 10 years,
01:50 then operates at a free cash flow margin of 15%, free cash flow in 10 years time would
01:55 be roughly $13 billion and a 35 times multiple on that would put the valuation at $452 billion.
02:03 That works out to an investment return of only 8.6% a year.
02:07 So Netflix needs to dramatically increase its revenue growth in order to justify its
02:12 premium valuation. The company does have options, it can introduce different payment tiers,
02:17 it can scale up advertising and it can branch out into different products. But we're not
02:21 seeing much progress. Advertising is producing so little revenue that it wasn't included
02:27 in the company's shareholder letter and the company is no longer talking about video
02:31 games. There's a tricky balance, Netflix needs to
02:34 grow but increasing prices or bringing in ads is going to hurt subscriber numbers. And
02:39 that's because there are so many good alternatives out there. It's easy to focus on streaming
02:44 channels but the fastest growing platform according to Nielsen is actually YouTube at
02:49 8.8% of screen time and that's higher than Netflix at 8%.
02:54 So with Netflix stock valued at 47 times earnings, there's a real risk that the stock becomes
03:00 trapped money. That's why I give the stock a negative rating but these are my personal
03:04 opinions not financial advice and I hold no position in Netflix stock. For more detailed
03:09 investing ideas make sure to visit our website overlookedalpha.com