Netflix (NASDAQ: NFLX) is planning to address the issue of account sharing among US customers by implementing a charge for such users, which could lead to increased growth in the latter half of the year. The company has already experimented with methods to curb account sharing in Latin America and has introduced charges in four regions. With over 100 million users accessing accounts without paying, analysts believe that paid sharing could open up new revenue streams for Netflix. Initially scheduled for the first quarter of 2023, the company now intends to roll out this charge in the coming months.
As of 20 Apr 2023, Netflix Inc's stock is trading at $327.24 and year-to-date (YTD), it is up by 11%. Over the past 12 months, the stock is up by 45%, whilst the S&P 500 is down by 7%, which means the stock has outperformed the broader market by approximately 52% over this period.
Is Netflix Inc a long-term investment opportunity? Let’s take a closer look at the company's fundamentals to find out.
Why Is Fundamental Analysis Important?
Fundamentals are a set of key metrics that, when looked at holistically, can tell us whether or not a company is likely to be a good investment over the long term. Investors have relied on fundamental analysis for decades to assess the financial health of an organization as well as its growth prospects.
On balance, stock prices are usually driven by a company’s financial performance over the long term, and it makes sense to analyze a company’s fundamentals in detail before deciding to invest.
There are a number of fundamental metrics to analyze, but we'll be focusing on the price-to-earnings ratio (P/E ratio), price-to-book value (P/BV), price-to-sales ratio (P/S ratio), earnings per share (EPS) and debt.
What do Netflix Inc’s fundamentals tell us about the investment opportunity? Let's have a look.
Netflix Inc's Stock by the Numbers
First, let's look at Netflix Inc's EPS, which serves as an indicator of profitability. This metric is calculated by taking a company's net income (after dividends on preferred stock) and dividing this by the number of outstanding shares.
Based on its most recent financials, Netflix Inc's EPS is 9.95, and year-on-year, it has decreased by 11%. This is sluggish growth.
Another key metric to look at is the P/E ratio because it immediately tells a potential investor how cheap or expensive the stock is. The ratio tells us how much investors are willing to pay for a company’s earnings, and it is calculated by taking the price of a stock and dividing it by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates it might offer more value.
NFLX has a P/E ratio of 34.7, based on its last reported financial data. This is 50% higher than the average P/E ratio across its industry (which is 23.1) and indicates that the stock is relatively expensive in relation to how much it earns.
Next, let's look at one of the most common valuation metrics - the P/S ratio. It is calculated as the current price divided by sales for the previous 12 months and helps us get a sense of how much investors are willing to pay for a company's revenues on a 'per dollar' basis.
Netflix Inc's P/S ratio is currently 4.6, according to its last reported filings. This is 10% higher than the sector-wide average of 4.2. The fact that it is currently above the sector-wide average isn't particularly encouraging and indicates that the stock may offer less value compared to other companies in the same sector.
Next, let's look at Netflix Inc's price-to-book value (P/BV), which tells us how much investors are willing to pay for a company's assets. P/BV is used by value investors to identify potential investments and is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book').
Netflix Inc's P/BV is 6.9 according to its most recent financial statements, and this is 40% higher than the average across the industry, which is 4.9.
Finally, when analyzing an investment opportunity, you should always take a look at how much debt a company has on its books, as this can help you assess how risky it is as an investment. Carrying a large amount of debt can be a red flag if the company is not generating enough free cash flow to service the debt.
Netflix Inc has total debt of $16.93bn as of 20 Apr 2023, and this has fallen by 7% over the past year. Adjusting for $6.06bn in cash & short-term investments, the company has a 'net debt' of $10.87bn.
Based on these figures, Netflix Inc's current levels of net debt don't worry us, as the company generates enough revenue to service its debt and is not using debt to fund its operations, which is good to see.
Is Netflix Inc a Good Investment?
All in all, when we looked at the underlying trends at Netflix Inc, we found that they paint a mixed picture in terms of the company's long-term outlook.
In summary, there isn't enough for us to say that Netflix Inc deserves a place in your portfolio right now, but it's worth keeping an eye on.
As with any stock, however, there are additional factors to consider before making an investment decision. This analysis is general in nature and based on historical data, and it does not take into account your specific investment objectives or financial circumstances. Additionally, this article does not look at the macro environment where geopolitical headwinds, internal company changes and individual technicalities in the way a company conducts its business can have a significant impact on a company's long-term outlook. Please do your own due diligence before deciding to invest.
About Netflix, Inc.
Netflix is a leading entertainment services provider, offering various leisure activities, including video streaming, gaming, and other amusement options. The company operates in two primary geographic segments: the United States and internationally. Founded by Marc Randolph and Wilmot Reed Hastings on August 29, 1997, Netflix is headquartered in Los Gatos, CA.
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