Value Thoughts - Netflix, Inc.
Netflix, Inc. (NYSE: NFLX), according to the company, is the world’s leading Internet subscription service for TV shows and movies with 20 million current subscribers.
Subscribers can instantly watch unlimited TV shows and movies streamed over the Internet to their TVs, computers and mobile devices and, in the United States, subscribers can also receive standard definition DVDs and Blu-ray discs, delivered to their homes.
The company's core strategy is to grow its streaming subscription business within the United States and globally, with a focus on expanding its streaming content, enhancing its user interfaces, and extending its streaming service to even more Internet-connected devices, while staying within the parameters of its operating margin targets.
Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 18, 2011.
Short-Term Investment Valuation
On the positive side, the stock closed recently at $295.14, with Resistance at $297.35, a 1% increase from the recent close.
On the negative side, First Support can be found at $254.66, a 14% decline from the recent close, with Second Support at $210.68, 29% decline from the recent close. Should the stock break through Second Support, the next support level is $95.33, a 68% decline from the recent close.
The 13-week Relative Strength number is currently 37, with the stock price trending upward. More importantly the daily Relative Strength number is near 76 and it is also trending higher, putting the current stock price well into the overbought category.
Quarterly earnings, currently scheduled for release after the markets close on 7/20/2011, are expected to be $1.11 with the current whisper number at $1.17.
Earnings Growth Valuation
Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.
In the case of Netflix, Inc., the company had a year over year earnings growth of 99%, ending FY10 with earnings of $9.05 per share.
With a trailing twelve month PE currently at 33, the spread between earnings growth and the PE is 3.0, meaning that for an investor focusing strictly on earnings growth, the stock should be trading at $322.66, a $27.52 increase from the recent close.
Fundamental Investment Valuation
Liquidity: The company ended FY10 with a Current Ratio of 1.65, a Quick Ratio of 0.90, a Cash Ratio of 0.90, and a Cash Conversion Cycle of less than 1 day. In addition, Goodwill and Intangibles comprised 18.6% of Total Assets. When adjusted to compensate for these items, the company's Book Value of $5.34, drops to $1.98.
Profitability: FY10 found the company with a Gross Margin of 53%, an Operating Margin of 28%, a Net Operation Margin After Taxes (NOPAT) of 23%, a Return On Invested Capital (ROIC) of 142%, and an Effective Tax rate of 39.9%.
Debt: The company ended FY10 with Total Debt of $236.2 million, a year over year increase of 7%. Additionally, the company paid an average annual Interest Rate 8.30%, a year over year increase of 5.57%. The company had a Debt to Cash Ratio of 0.67, and a Debt to Equity Ratio of 0.81.
Cash Flow: The company's FY10 Operating Cash Flow was $10.11 per share, a year over year increase of 45%. The company also ended FY10 with Free Cash Flow of $7.20 per share, a year over year increase of 148%.
Dividends: During FY10 the company did not pay a dividend.
Fundamental Valuation: Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $56-$60 range.
We think the stock is ridiculously overpriced. What's more, we think that at the current pace the vast majority of individual short-term investors, and those that have recently taken a position in the stock, are going to get smoked, waking up one morning and asking the dog what just happened.
It is not that we don't like the company, far from it. We just believe investors are listening to all of the hype and cow paddies that is Wall Street, and once the parade has passed, there simply will be no available shovels for them to use to clean up the mess.
As impressive as 99% year over year earnings growth may be, we simply do not believe such growth is sustainable, making us wonder why investors are willing to pay such an incredible premium to own a stock that currently has more downside than upside.
Considering a Recent Close of $295.14, an estimated Merger and Acquisition payback of 26 years (assuming EBITDA remains the same), year over year earnings growth of 99%, year over year free cash flow growth of 148%, and our reasonable value estimate of $56-$60, we believe that on a fundamental investment basis the stock is currently OVER PRICED, and not a candidate for additional research for the Wax Ink Portfolio.
We have no position in Netflix, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.