With over 209 million members across 190 countries, Netflix (NFLX) is one of the world’s largest entertainment services.
The platform offers a wide variety of visual content, including television series, feature films, and documentaries in a wide range of languages and genres.
Netflix allows its users to play, pause, and resume watching, without having to sit through any commercials or other commitments, effectively revolutionizing video media consumption.
I am neutral on the stock, as its competitive positioning and strong growth momentum are offset by its rich valuation. (See NFLX stock charts on TipRanks)
Netflix derives its value mainly through its periodic subscription fee, while the company’s competitive advantage resides in its brand name, along with the wealth of content that the platform has to offer.
This advantage has resulted in very strong customer loyalty, consistent customer growth, and, perhaps most importantly, the accumulation of massive consumer data that Netflix can then use to produce content that is satisfactory for its current users and attractive for potential ones.
Moreover, the data can be employed to execute more effective targeted marketing.
Netflix has been one of few companies that have been positively impacted by the COVID-19 outbreak, and subsequent lockdowns.
With consumers spending more time at home and having fewer options for leisure, digital media consumption has surged over the past year and a half.
As a result, Netflix continues to enjoy steady growth in revenue, bringing in $7.3 billion during the second quarter of 2021 – up from the $7.2 billion of revenue generated during the first quarter. Net income, however, has dipped by $354 million during the last three months.
Consequently, diluted EPS has dipped from $3.75 during the first quarter, to $2.97, and is forecasted to further decline to $2.55 by the end of the third quarter – something that might concern shareholders.
While Netflix continues to enjoy increases in revenue, the simultaneous dips in profits and EPS do not paint a great picture. As things continue to drift slowly towards normalcy, it will be interesting to see how Netflix’s financials fare in the coming months, and years, in the face of growing competition from other streaming businesses.
Netflix stock is fairly expensive given the growing competition it is facing. While it trades at a reasonable 8.7x revenue, it trades at a 55.6 multiple of forward normalized earnings, and a whopping 2,296.7x forward free cash flow.
Revenue is expected to grow at a mid-teens rate for the foreseeable future, while normalized earnings per share is expected to grow by 74.1% this year, and then by 22.7% in 2022.
Wall Street’s Take
From Wall Street analysts, Netflix earns a Moderate Buy consensus rating, based on 23 Buy ratings, six Hold ratings, and three Sell ratings in the past three months. Additionally, the average NFLX price target of $618.21 puts the upside potential at 1.9%.
Summary and Conclusions
Netflix remains the global leader in video streaming, but the sector is growing increasingly competitive, which could eat into margins.
As a result, we think investors might be well served waiting for a better entry point before buying shares of the stock.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
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