Netflix (NASDAQ:NFLX) stock will likely do well over the next year. It is forecasting higher earnings and a path to free cash flow.

Netflix’s operating income at $2.6 billion for 2019 was up 62% year-over-year. Moreover, the streaming content provider predicts that its upcoming Q1 operating income will be $1.033 billion. That is very significant.

Not only is it very precise, but it presents a gain of 125% over Q1 2018 and even 5.4% higher than the previous peak in Q3 2019. Let’s look at what Netflix forecasts about its ongoing sales growth.

First, you can see in the chart below that Netflix expects its sequential quarterly sales growth to continue moving higher.

The column in blue represents Netflix’s own prediction for its Q1 2020 sales ending March.

But as I mentioned earlier, the growth in operating income is expected to take off.

You can see this progression in the chart below. Note again that the Q1 2020 estimate for operating income and margins come from the company itself.

It clearly shows that the company’s underlying profitability is increasing over time.

Going from Strength to Strength

The point is that Netflix is going from strength to strength. This is a lot different from what happened earlier this year.

For example, in my last article on Netflix — “Don’t Worry Netflix Stock Will Survive”— on Sept. 13, 2019, Netflix stock was near its bottom.

At the time, I made the point that Netflix’s finances and its inherent appeal to consumers would likely pull it through.

In fact, Netflix’s latest shareholder letter indicates that its free cash flow will slowly turn positive. It said that the FCF deficit had peaked at negative $3.3 billion.

Over time it expects to rely less on the public markets for debt financing to make more movies and grow its subscription base.

What is clear is that if the markets start to see this improvement in FCF during 2020, the stock will begin to fly. Here is why: most media companies are expected to be superbly profitable even on a cash flow basis.

As a result, they get receive valuations by the market. So once the market suspects that Netflix is becoming FCF positive, the stock will get rerated upward.

Streaming Subscriptions Growth Continues

You can see in the chart below that streaming subscriptions continued to grow. In the last year, total subscriptions lept 20%. However, in 2018, streaming membership was up 25%.

The reason growth has slowed is that U.S. subscription growth has waned, up up just 4.4% in 2019, a dramatic slowdown from the 10.7% growth in 2018.

If they can get membership growth back on track and Netflix does not have to reduce its pricing, you can see inherently how FCF could get positive over the next several years.

This will have a massive effect on NFLX stock.

Estimating the Value Using FCF

One way to project the value of NFLX stock is to estimate the value of the subscriber base once NFLX becomes FCF profitable.

For example, if roughly 80% of the gain in operating income into additional free cash flow, then it is possible Netflix will be cash-flow positive within three to four years.

Moreover, we can estimate the value of its subscriber base when Netflix turns FCF profitable. Here is how that is done.

First, the value of every subscriber is worth about $120.63 in sales. That is derived by taking 2019 revenue of $20.15 billion and dividing it by the 167 million subscribers.

Second, since we can estimate there will be 346 million subscribers by the end of 2023 if the base grows by 20% each, we can estimate revenue. That will be $41.78 billion by 2023, or over double this level in 2019. This was derived by taking multiplying $120.63 per subscriber by the estimated 346 million subscribers.

Lastly, we can use today’s revenue multiple and apply it to $41.78 billion in revenue. NFLX stock trades at 8.3 times EV-to-Sales. Applying that ratio gives a market value of $336.8 billion, or $767.65 per share. That is a gain of over 114% over the next almost 4 years to 2023 year-end.

Applying a present value factor leads to an estimated value today of $631.55 per share for NFLX stock. That is a gain of 76% over 3.8 years. The average annual expected return is 16% per year.

Bottom Line on Netflix Stock

If present growth trends continue with 20% year-over growth in memberships in the next three to four years, Netflix stock could easily be worth 75% to 100% more than its present price. This is based on its present valuation multiple.

It is possible the multiple could fall or the growth rate could dip. However, along with this growth, the company will likely become free cash flow positive. That will also tend to support a huge increase in its valuation.

So, despite worries about a possible recession, it is likely NFLX stock will do quite well over the next several years.