What would I pay for NFLX?

Investment Analysis Clubs Saul’s Investing Discussions
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This may be a little off topic, but I’m basing it on the principles we on this board use to value things, and I hope it will be at least a little interesting and maybe amusing. Apologies if anyone finds it misplaced.

This guy thinks NFLX might be a buy at a share price of $50. http://investorplace.com/2016/02/netflix-inc-nflx-stock-pric…

I think even that is a bit pricey.

Even using non-GAAP numbers, NFLX made 28 cents a share in 2015 and expects to make 27 cents a share this year. Even at a generous PE of 25 (I’ll pick 25 since they’re growing revenue at 25%), that equates that equates to a value of $7 per share. It takes the absurd 300+ PE to get NFLX to its current share price.

In 2017, NFLX is expected to somehow eke out $1.05 per share. I’m skeptical. NFLX inevitably grows revenue at a steady 25% pace, but they’ve had a lot of trouble getting that revenue to the bottom line. There’s an upcoming price hike that will help a lot. But NFLX isn’t the only one raising prices. Their COGS as a % of revenue has hovered around 70% forever. Literally, I looked back to 2006. It’s actually higher now than it was then – while revenue is now 6x what it was. Also, the R&D spend is about twice as much percentage-wise as it was in 2006. Luckily SG&A is down to balance that out. So despite all the great revenue growth, margins haven’t improved thus far.

The price increase is about 11%. Let’s go absolutely nuts and drop almost half of it to the bottom line. Let’s say NFLX goes from a Net Profit Margin of less than 2%, to 7%. Net Income would jump from 25-30M per quarter to more like 125M or 150M. Again using a PE of 25, the top end of that spectrum would make NFLX worth about $33 a share.

I know, 400% or more EPS growth in the next year or two seems a little absurd, and I certainly don’t think the impact will be that immediate. But even if it is, look what we get: $33 a share? It’s selling for over $100 right now.

That is one possible near future. Maybe the rosiest one I can imagine. There is also the risk that things don’t work out that way. So even $33 is too much to pay for the stock today. I think I’d set the price somewhere between $7 and $33…say about $20/share.

$20. One fifth of Mr Market’s price today. That’s what I’d pay for NFLX, if I were interested in being a shareholder.

Bear

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Then you will likely never own this stock Bear :slight_smile:

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While I disagree with the response that you will never own this stock ( I believe sometime in the distant future, NFLX will actually trade at 20X or 30X trailing earnings), I believe your current assessment is flawed.

NFLX already has a positive contribution margin in it’s matured market i.e USA. However, they claim they are reinvesting the gains into expansion, and the losses from those currently unprofitable markets are offsetting gains from profitable markets.

I think it makes business sense for NFLX to expand if there is opportunity. If you made 100K a year, but knew that spending 300K on a special type of education over the next 3 years would earn you 200K after 3 years, you would go ahead and invest. That would mean your net savings rate for the next 3 years could be negative 80K per year. But you might do it anyways. Why should NFLX not invest for it’s future then?

I believe the estimates for 2019 and beyond are high enough to make the current price look like a bargain. Stock valuations is all about the future. More specifically, stocks current price in theory must equal the present value of it’s future cash flows. Of course, even that is not exactly right. The exact answer is, it is the present value of estimated future cash flows discounted at an estimated rate.

Based on the current stock price, I think it is fair to conclude that the market currently believes in the bright future of NFLX. (market reserves the right to change its mind)

On the flip side, even though AAPL’s trailing LTM PE is only around 9 or 10 (not sure), the market clearly does not believe this company will have a bright future (they could be wrong of course, which is why from any given point, all stocks dont produce the same rate of return)

Since the stock price fluctuates wildly, it must mean that the assumptions that go into the estimated future cash flow or the estimated discount rate must fluctuate wildly. Since the future rate of return of every stock will be different and we will find that rate out after the fact, it also means, the market is constantly way off in their assumptions. It seems a select few like Saul have gotten it right (but even he crapped out in 2008). BTW, if thousands of people engage in this game, some will come out ahead. I do follow Saul, because Saul claims he has done well, but also, when asked about his principles, those principles made sense to me. I do not agree with everything he does. For e.g. I don’t have the daring to invest all my money in 19-20 stocks.

NFLX appears to have a huge amount of potential. I do not own the shares, but would not dare to bet against NFLX?

Which brings me to this question? Why nobody here is talking about DIS? I dont blindly buy a good company just because it is good, but DIS appears to be undervalued. It is arguably one of the crown jewels of America and without any doubt a higher quality business in the S&P500. Some might argue it is better than Facebook, Google, Apple or Netflix. S&P500’s trailing 12M PE is approximately 23.5, whereas DIS is under 19. Why is Disney not a screaming buy?

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Which brings me to this question? Why nobody here is talking about DIS?

Ahem.

http://discussion.fool.com/disney-quarterly-update-2016-q2-editi…

and

http://discussion.fool.com/disney-quarterly-update-32109485.aspx…

Seriously, Disney is opening up its Shanghai park later this month. It has dominated the box office this year with hit after hit (e.g. Zootopia, Jungle Book, and Captain America). And its ability to cross-promote (movies drive studio revenues which in turn drive merchandise sales which in turn drive park attendance) is unparalleled. I like Disney a lot as a sort of large cap portfolio anchor with a growing dividend and extremely reasonable valuation.

And I haven’t even mentioned the five Star Wars movies planned for the next five years.

Matt
Long DIS
MasterCard (MA) and PayPal (PYPL) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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on NFLX, you said: “I believe the estimates for 2019 and beyond are high enough to make the current price look like a bargain.”

Huddaman:

on what basis are you saying that? the expectation is that Netflix has room to grow and its investment in content will continue to pay off. In 3 years the outlook may be different and the willingness to pay the current premium may change. If that does not change then you can call it a bargain but what if that change?

I am long NFLX and own it. I also own DIS and I tend to agree it is a bargain now. The ESPN trouble will sort itself out.

tj

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on what basis are you saying that?

Analyst Estimates for 2019 are high. It’s is simply a fact. The consensus estimates for 2019 and 2020 EPS are $4.03 and $6.09 per share respectively. Will the actual differ materially from estimates? Sure. But when you buy a business or speculate on a stock, you have to have some basis. This is the current basis or consensus on Wall Street. Analysts are free to update their estimates as many times as they wish.

$101 price on $6.09 earnings in 2020 is only 17 PE. That’s why I argued that on a PE basis it is not expensive, if you “believe” the analyst estimates.

The reason I sold is, I don’t like the risk reward. It is possible that they make $6 as expected. Even if they get there and earn 30X multiple, we get $180 per share stock price. Sure that’s a decent return. But there is no safety. They don’t make enough money today.

I guess, there is no way to know whether DIS too will make over $7 that analysts expect of them in 2019. But DIS made around $5.50 in 2015. That’s past. But atleast it is a good basis. NFLX lacks that solid basis. In 2015, they made next to nothing. (60c for 166 PE)

On the flip side, if NFLX meets or exceeds $6 estimate in 2020, you not only get a 40% gain from here, but potentially 15-18% growth in EPS beyond 2020 until they saturate in each and every market. That might take a long time. That is why it’s hard to bet against NFLX.

The risk is, if analysts no longer see a rosy future, and cut the 2020 estimates from $6 to say $3, the stock will take a 50% haircut (I think). For $8 a month, the product is a compelling value.

http://files.shareholder.com/downloads/NFLX/2170052736x0x886…

This page shows that the US Streaming business earned a 35.5% contribution margin. That is about $413 million in a single quarter. Their contribution margin internally is -16.1%. They expect things to eventually turn around once they gain sufficient subscribers.

Analysts based their bullish estimates very carefully after a lot of analysis. I give them credit. But ofcourse, the nature of their job is to accurately predict the future. That is an impossible task.

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I got that. Even if they make $6 EPS in 2020, the PE could remain 17 or it could be 30 or higher. The appetite of the market is unpredictable.

On the other hand, earning estimates are not only inaccurate, they are simply useless the longer in the future you get.

I just don’t give much credance to this kind of analysis.

You would agree that you would not have considered an Amazon earlier this century. There was simply no ways to know the degree of success (or in some case failure) this kind of business would enjoy (or suffer) several years into the future.

Netflix or Amazon which future are wide open, it is the kind of business that lend itself to this kind of arguments. The honest answer I think is nobody really can give any number that is meaningful except for a guess.

Disney on the other hand, I believe may be more meaningful to value.

tj

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Is Disney more meaningful to value because it has past eaenings?

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Huddaman,

I’m not sure why you initially said you believed my analysis was flawed, but everything you have added supports my point: NFLX is way overpriced. I especially agree with your points about the risk/reward not being there.

A while back I concluded that the three main drivers of stock price are 1) perceived growth potential, 2) perceived risk, and 3) irrationality.

I believe NFLX is so overpriced simply because I think, based on the current share price:

  1. the perceived growth potential is exaggerated
  2. the perceived risk is being under-appreciated
    and 3) a lot of hopes, dreams, story, and bandwagoning is causing people to invest in NFLX – it’s darn near the most fashionable stock to own right now.

The lesson, kids: Do something better with your money for the next 4 years than hope NFLX can find $6 of EPS. They may get there. And they may find some other carrot to dangle then to keep the PE up…causing me to be dead wrong and actually making it a halfway decent investment today. But don’t bet on it. There are too many better buys, and a lot of money to be made elsewhere in the next 4 years.

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I’m not sure why you initially said you believed my analysis was flawed, but everything you have added supports my point

Yes, I still dont agree with your assessment. I believe it is flawed because you are simply looking at the past. You are ignoring the future potential. If people simply bought stocks based on the glorious past, then AAPL would be selling at 30 times earnings not 10 times. In the end it’s my opinion that your opinion is flawed. Please dont take it personally. Its merely a difference of opinion. You are welcome to call my analysis flawed too. If flawed is too strong a word, I will take it back.

Secondly, I just tried to present a balanced view. Overall, I believe NFLX is fairly valued to slightly overvalued. But I can see the bullish viewpoint far more clearly than the bearish viewpoint. Bearish viewpoint appears to be, the PE is too high. That’s obvious. And my point is, that ignores the future potential. The latest YoY quarterly revenue growth was 24%. That along with the possibility of improvement in operating and net margin as they reach a critical mass in those international markets and you end up with tangible EPS and reasonable valuation.

If analysts are wrong about $6, but you get $5, you could still get run over by NFLX (if shorting). They could still earn 30X or even 40-50X even on the $5 earnings. I believe while < 5% grower such as MCD or KO can deserve a healthy 18-22 PE, then a 20% grower can command a lot more, especially if the business model is sustainable. At this time, while NFLX has competition, I don’t know of a pure alternative Pepsi type alternative to NFLX’s Coke. Amazon Prime is a watered down competitor. And the rest offer scattered content. Nobody is as widespread geographically or has such a breadth of content as NFLX in my opinion. And the fact that they earn 35.5% contribution margin in the US streaming business with $7.99 basic plan or $11.99 per month for the premium plan is simply unimaginable and unachievable for any potential competitor.

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