One of Wall Street's biggest winners of the day is Netflix, a discount store company whose shares have climbed 10.4% to a price of $759.02 -- 5.58% above its average analyst target price of $718.88.
The average analyst rating for the stock is buy. NFLX outperformed the S&P 500 index by 10.0% during today's morning session, and by 33.2% over the last year with a return of 71.5%.
Netflix, Inc. provides entertainment services. It offers TV series, documentaries, feature films, and games across various genres and languages. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Netflix's trailing 12 month P/E ratio is 43.0, based on its trailing EPS of $17.67. The company has a forward P/E ratio of 32.8 according to its forward EPS of $23.11 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.6, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Netflix's PEG ratio of 1.36 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
Netflix's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 7,274,301 | 348,552 | 6,925,749 | 327.9 |
| 2022 | 2,026,257 | 407,729 | 1,618,528 | 1326.39 |
| 2021 | 392,610 | 524,585 | -131,975 | -106.84 |
| 2020 | 2,427,077 | 497,923 | 1,929,154 | 161.43 |
| 2019 | -2,887,322 | 253,035 | -3,140,357 | -10.02 |
| 2018 | -2,680,479 | 173,946 | -2,854,425 |
- Average free cash flow: $724.45 Million
- Average free cash flown growth rate: 27.9 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, NFLX is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Netflix's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 14, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.19 as of the third quarter of 2024.
Netflix is by most measures fairly valued because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend. The stock has strong growth indicators because it has a an inflated PEG ratio and strong operating margins with a positive growth rate. We hope you enjoyed this overview of NFLX's fundamentals.
