It seems like a good time to gather together everything we know about Netflix, Inc. (NASDAQ:NFLX) and see what to do about Netflix stock, if anything. It isn’t that complicated a story, actually. What is complicated is dealing with a stock market that seems to have gone nuts when it comes to valuation.
Have a look at the last earnings report, which is what I’ll be referring to in this article about Netflix stock.
The domestic streaming customers number is growing at about 10% year over year but leveling off quarter to quarter. Revenues are increasing QTQ still, with gross profit at $475 million in the last quarter and $1.68 billion in the trailing 12 months. That suggests that, on its own, this segment probably still has a bit of pricing power left in it, as other monthly services are a wee bit more expensive.
Average expenditure is $8.49 per month. My guess is Netflix could maintain at least 40 million memberships — roughly similar to HBO — if it continues producing high-quality original content.
This is really the only way it can go now, anyway, since older content can be licensed by just about any streaming service. On that theory, over time, Netflix stock could enjoy sizable increases in revenue — $480 million annually on just a $1 per month increase — for some time. I think, for now, consumers will tolerate as much as $11.99 per month.
International streaming customers are growing handily, both YOY and sequentially. It is coming at great cost, though. Segment contribution is a loss of $350 million in the TTM. This isn’t a big surprise, as NFLX pulls out the stops to market the heck out of itself abroad.
Time will tell if there is any pricing power here, or if customers balk. Right now, it’s about $7.25 per month. I think there’s room to go to $8.99 over time, adding $800 million annually.
Domestic DVD remains a viable cash flow generator. There are still 4.27 million subscribers generating $23 million per month in profit, and about $275 million annually. This will continue to decline, but still be around for at least 2-3 years.
Net income is only $163 million in the TTM.
Now, Netflix stock does have $1.3 billion in cash with which it can continue to make new original programming. It said it will raise debt soon, to add to its $2.37 billion load. It pays $142 million in interest so far, but its next raise will likely cost 9% to 10% annually.
It burned over a billion dollars over the past year, however.
Netflix stock has a bit of a liquidity issue. Without a new capital raise, it will burn through its cash in less than 18 months at the present rate. A billion dollars in debt would buy NFLX another year.
NFLX will have to raise prices domestically, which will help a great deal. Even a dollar helps. It should also hit break-even internationally in 12-18 months.
It also has one other trick up its sleeve.
By creating original programming, which has been of terrific quality, it can try and license its own programs to other streaming services and traditional networks. I don’t know if it will work, and it could mean cannibalizing some of its own subscribers, but this could also create some good cash flow.
Alternatively, it could also sell its library outright and make out nicely.
Yet all this does is get NFLX to a place of sustained profitability. That takes us to valuation. Right now, at a market cap of $52 billion, it trades at 332x earnings. That is simply crazy.
In order to justify that valuation, let’s say NFLX is able to get to a point where it is regularly increasing EPS at a rate of 30% — to justify a P/E ratio of even 60x. It would have to increase its net income to $800 million. That won’t happen any time soon.
Then again, the stock market will do whatever it feels like doing. So on a strictly fundamental basis, the Netflix stock price makes it a short. On an emotional basis, your guess is as good as mine.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
