Netflix (NASDAQ: NFLX) is a subscription-based streaming service through which members can view TV shows, documentaries, and movies on any Internet-connected device.
The company also offers its DVD-by-mail service in the United States. The company was founded in 1997 and is headquartered in Los Gatos, California.
I am bearish on NFLX stock. Strong fundamentals come with a very elevated valuation. The stock’s underperformance in the past year may continue in 2022, as any miss in global subscriber growth should raise concerns about both profitability and the rich stock price.
Netflix: The Bullish Side
Investors have several reasons to be optimistic about NFLX stock. Netflix’s operating margin is expanding, a very positive sign. In FY 2018, 2919 and 2020, the operating margin was 10.2%, 12.9% and 18.3%, respectively. On a TTM basis, it stands at 22.8%
The price-to-book-value ratio of 16 is close to a five-year low of 15.6. The P/E ratio of 48.8 is also a five-year low.
Netflix has shown predictable revenue and earnings growth. Growth in key metrics has been a reason why the stock price has risen from $142.13 on February 1, 2017,just under $540 today.
On top of that, NFLX stock has a 52-week range of $478.54–$700.99. Patient and not greedy, but lucky investors selling the stock near the 52-week high would have avoided this recent decline off its highs.
The 10-year average growth of revenue, operating income, net income, and EPS is 27.73%, 32.37%, 32.88%, and 30.55% respectively.
The price-to-sales ratio of 9.7 is close to a one-year low of 8.07. The Altman Z-score of 7 is strong too.
Netflix: The Bearish Side
Netflix has a three-year consecutive trend of decelerating revenue growth. In FY 2017, the company reported revenue growth of 199.41% to $558.93 million, which declined to 116.71%, 54.13%, and 47.91% in FY 2018, 2019, and 2019 respectively.
The company has one of the worst D/E ratios in the entertainment industry. The D/E ratio of 0.97 is considered too high.
Compared to an average industry P/E ratio of 23.76, Netflix is more expensive than its industry peers.
The forward P/E ratio of 47.2 also indicates an expensive valuation of NFLX stock.
Notably, the Beneish M-Score of -1.73 is higher than -1.78, which implies that the company might have manipulated its financial results.
Q3 2021 Earnings
In Q3 2021, revenue grew 16% year-over-year to $7.5 billion, a beat by $161,410. Normalized EPS of $3.19 was a beat by $0.63. NFLX stock earnings have been strong in 2021 compared to 2020.
Global Streaming Paid memberships had year-over-year growth of 9.4%, and the forecast for Q4 2021 is 9%.
Wall Street’s Take
Turning to Wall Street Netflix has a Moderate Buy rating based on 23 Buys, four Holds, and three Sells. The average Netflix price target of $675.54 represents 25.9% upside potential.
Bottom Line
Netflix has strong fundamentals, and improving profitability margins, but it also has a lofty valuation.
It has an erratic free cash flow trend, and the operating cash flow trend is non-stable. In 2022, growth stocks such as Netflix may be prone to weak performances.
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