Netflix, Inc. (NASDAQ:NFLX) saw its stock get knocked down in March and April. NFLX stock fell from $330 to $280 as broader tech concerns weighed on investor sentiment. But as the old saying goes… no one can keep a good man (or stock) down for long. Netflix earnings just hit the tape. They were stellar. Everything beat across the board.
Subscriber growth? Far better than expected, both internationally and domestically.
Revenue growth? Also far better than expected, with the company posting its fastest revenue growth ever in the streaming era.
Margin expansion? Again, far better than expected, coming in more than 200 basis points ahead of guidance.
The guide? Yet again, far better than expected, with strong outlooks for subscriber growth, revenue growth, and margin expansion.
All together, the report beat on every important metric, checked off every box for investors, and once again illustrated that NFLX is still on its way towards world domination of the entertainment industry.
As for NFLX stock, Netflix earnings sent it back up towards that $330 level it hovered around in early March before the bears came out of the woods.
Is there more upside? Yes. In a multi-year window. NFLX stock can easily head towards $750 and up over the next 9-10 years.
But in the near term, Netflix earnings have pushed NFLX stock back into fair value territory. Thus, while shares aren’t overvalued here, they also aren’t undervalued.
Here’s a deeper look:
Netflix Is Marching Toward World Domination
If anything is clear by now, it is that Netflix has entirely disrupted the entertainment industry, pioneered a new era of internet television and is marching towards world domination of consumer-facing entertainment.
Why is this so clear? Because each time Netflix reports quarterly numbers, the narrative is the same: NFLX’s growth refuses to slow down.
The domestic streaming market was supposed to be saturated by now. But at 57 million and counting domestic subs, domestic subscriber growth is actually still accelerating.
International sub growth was supposed to have cooled down by now from unsustainable rates. But at 68 million and counting international subs, international subscriber growth is also still accelerating.
In other words, consumers continue to flock to Netflix at an absurd pace. The reason for this is that Netflix dominates on the two things consumers care about most: price (it is much cheaper than cable) and convenience (it is on-demand, multi-screen entertainment, versus pre-programmed, single-screen entertainment).
Meanwhile, because Netflix dominates on price, the company has a ton of wiggle room to raise prices without any material user churn. This is happening. Average selling price per subscriber rose 14% in the quarter.
This robust ASP growth is additive to margins, which rose 230 basis points year-over-year. This robust margin growth is expected to continue, and operating margins are expected to expand 300 to 350 basis points this year.
Netflix Earnings Push Stock Into Fair-Value Territory
But just because Netflix has huge revenue growth and margin expansion drivers in play, that doesn’t mean NFLX stock can head higher forever.
Indeed, every stock has a fair value price. Netflix earnings seem to have pushed NFLX stock towards its fair value price.
Before, I thought that NFLX could get to 350 million total subs in 10 years, and that ASP per month could climb to $15 (from roughly $9.60 last quarter, which was up roughly 13% year-over-year).
Now, given the fact that NFLX’s annual net adds number is now nearly 30 million, my 350 million 10-year sub target seems conservative. It is more likely that NFLX has 375 million total subs paying $15 per month in 10 years.
That would lead to revenues of $67.5 billion in 10 years. I still believe operating margins can get to 30% (from 12% last quarter) based on robust ASP growth. A 30% operating margin would imply operating profits of $20.3 billion in 5 years.
Taking out $500 million for net interest expense, 21% for taxes, and dividing by a presumably higher share count of 500 million, that equates to roughly $31.20 in earnings per share in 10 years.
A Facebook, Inc. (NASDAQ:FB) or Alphabet Inc (NASDAQ:GOOG) average forward earnings multiple of roughly 25 on those $31.20 earnings implies a nine-year forward price target of $780. Discounted back 10% per year, that equates to a present value of roughly $330 for NFLX stock.
Bottom Line on NFLX Stock
Strong Netflix earnings support that this is a big growth story with a powerful stock that can and will head higher in the long-term.
But in the near-term, the strong quarterly numbers seem to have thrust NFLX stock into fair value territory. Thus, upside in the near-term may be limited by a stretched valuation.
Nonetheless, this is a name you want to add exposure to on any material dips back towards $300.
As of this writing, Luke Lango was long NFLX, FB, and GOOG.