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Netflix: Strong Growth, but Investors are Wary
Stock Analysis & Ideas

Netflix: Strong Growth, but Investors are Wary

I am neutral on Netflix Inc. (NFLX), as the company’s strong competitive position in its industry, strong growth momentum, and general support from Wall Street analysts is offset by its fairly high valuation multiples and increasingly competitive headwinds.

Netflix Inc. is an American streaming service and production company, founded in 1997 in Scotts Valley, California. It is now headquartered in Los Gatos, California.

Strengths

With about 214 million subscribers globally, Netflix is one of the fastest growing companies in the world. It is a member of the Motion Picture Association and is the largest entertainment company globally by market capitalization. As of 2021, it was ranked as the 8th most trusted brand in the world.

Netflix can be accessed on browsers or through apps. Moreover, it provides a library of movies and television series through distribution and also produces its own Netflix Originals.

Recent Results

For the third quarter of 2021, Netflix reported total revenue of $7.5 billion, showing an increase of 16% as compared with the same period last year. There was also an increase in operating income of 33%, bringing the value up to $1.8 billion.

The total number of new subscribers went up from 2.2 million to 4.4 million, resulting in a total number of paid memberships of 214 million. This number is expected to increase by about 9% within the next quarter of the year, bringing total subscribers to 222 million.

As of third quarter of 2021, the net income stands at $1.4 billion, which is an 83% growth since the previous year’s $790 million. Diluted earnings per share are reported at $3.19, which is again showing an increase.

The company’s revenue growth for the third quarter was driven by the increase in average paid memberships. The average revenue per membership also increased 5% compared to last year, due to the impact of foreign exchange.

A major portion of the revenue comes from the USAC region, despite the decrease in revenue compared to the same period last year. Meanwhile, EMEA is close behind and shows growth, while LATAM and APAC contribute approximately equal amounts, though LATAM shows a decrease since the same period last year, while APAC shows a significant increase.

Valuation Metrics

Netflix’s stock looks reasonable valued at the moment, as its Enterprise Value to EBITDA ratio is currently 42.42x compared to its 5-year average of 55.24x and its Price to Normalized Earnings ratio is 58.65x compared to its historical average of 85.15x. While the multiples are high, the growth prospects remain strong, as EBITDA is expected to grow by 25.1% in 2022 and normalized earnings per share are expected to grow by 23.2% in 2022 (see NFLX stock charts on TipRanks).

Wall Street’s Take

From Wall Street analysts, Netflix earns a Moderate Buy analyst consensus based on 26 Buy ratings, 5 Hold ratings, and 3 Sell ratings in the past 3 months. Additionally, the average Netflix price target of $680.88 puts the upside potential at .31%.

Summary and Conclusions

Netflix is a leader in the rapidly growing content streaming industry. That said, the space is also becoming increasingly competitive due to the entry of giants like Amazon (AMZN) and Disney (DIS).

On the other hand, Wall Street analysts are generally bullish on Netflix and the stock price looks reasonably valued here. While multiples remain lofty and growth potential is only decent in comparison, the company nevertheless does trade at a clear discount to its recent historical multiples.

As a result, while investors could certainly do worse investing elsewhere in the current market, it might be prudent for them to wait for a pullback in the share price before initiating a position.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

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