Netflix, Inc. (NASDAQ: NFLX)
Known as the King of Content, Netflix has been rendering subscription-based media services since 1997. In recent times, Netflix stock prices have soared to dizzying heights. But, the question remains—are they really worth buying this year?
To find the answer, we need to analyze the company to the fullest. The past 5 years have been quite good for Netflix stock—from $53.30 per share on Jan 8, 2010, the stock price is currently trading at $613.25 as of May 15, 2015. The company has had its fair share of hiccups along the years, and in no way was its journey completely smooth—the performance of Netflix stock in 2011-2012 validates this point best.
An Erratic Past
In 2011, the company’s stock was peaking at $295.14 per share. Stock prices went downhill after Netflix announced its plans to split the internet streaming media wing from the DVD rental wing; nearly 1 million customers defected because of the sudden change to their subscription packages. By September 2012, Netflix stock had hit a dismal low of $54.44 per share, creating panic in the minds of nervous investors.
The prices recovered soon enough after the company publicly discarded its plans to separate its business. By 2013, the company had hit a new benchmark with nearly 44 million subscribers and a triple digit year-to-date gain—Netflix stock gained almost 300% in 2013, closing the last day of the year at $368.17.
Recently, when the company released its Q3 results for FY 2014, Netflix stock instantly fell by 20% because customer growth hadn’t reached market expectations for the same quarter. Due to its highly volatile behavior in the past, the company has made investors wary of its prospects. Netflix, however, outperformed expectations in Q4 of FY 2014, earning $1.48 billion in revenue and a neat $83.4 million in profit. The fickle nature of Netflix stock was yet again made evident when it immediately gained 13% post the release of its Q4 results.
What Looks Good
The streaming media giant reported that it added 4.3 million new subscribers to its database in Q4, FY 2014 as opposed to 4.07 million additions in the same quarter last year. Netflix ended 2014 with a total of 57.4 million subscribers in its kitty, beating its Q4 forecast of adding 4 million new users.
In 2015, investors as well as Netflix customers have something completely new to look forward to—320 hours of original programming. As content production costs increase worldwide, Netflix aims to slowly reduce its dependence on traditional TV and film studios by creating original content in-house.
Global expansion has been a top priority for this media firm, and it plans to fully implement this agenda by 2017. After the Q4 earnings were announced, Anthony DiClemente, an analyst at Nomura Holdings Inc, a Japanese financial holding group, raised his price target on Netflix stock to $500. Following suit, a bunch of other analyst firms raised their prices targets for Netflix stock as well, including Raymond James, J.P. Morgan, Jeffries, Chase & Co., and Northland Securities; J.P. Morgan set the highest price target at $511.
After beating market estimates in the fourth quarter, the company’s international subscriber base has been projected to expand by more than 2 million customers in the first quarter of FY 2015. The company’s return on equity in Q4, FY 2014 turned out to be more than its ROE in the same period last year. This means that Netflix outperformed other companies in the Internet & Catalog Retail industry effortlessly, but fell short of the S&P 500. Revenues rose by 26.3% as compared to the same quarter in the previous year, helping boost the earnings-per-share.
What to Look Out For
When you scratch beneath the surface, you begin to see that the company’s state of affairs isn’t as rosy as it seems to be. Despite the bullish forecasts given by reputed analysts all over the world, there are many who believe that Netflix lacks more than a thing or two. Michael Pachter, a Wedbush analyst, maintains a bearish stance on the media firm, setting a low price target of $245 for Netflix stock.
According to him, the company needs to ramp up on its free cash flow weakness. In Q4, FY 2014, net operating cash flow significantly decreased by 196% to -$38.46 million as compared to the same quarter last year.
Although Netflix has a relatively low debt-to-equity ratio of 0.60, it is still higher than the industry average of 0.50. Recently, Netflix sold $1.5 billion in bonds, after initially planning to sell just $1 billion in debt. The company’s debt management remains ambiguous, and those who are seriously considering its stock should definitely examine it further.
The media industry is an old and established one, which does not take too kindly to newcomers. Netflix not only faces steady competition from industry stalwarts like 21st Century Fox, Time Warner, and Disney, but also has to contend with other streaming media firms like Amazon and Hulu. The company also demonstrates weak liquidity with its low quick ratio of 0.60.
Like the CEO of Netflix, Reed Hastings, himself had often said, there were many times when the company’s stock was perilously riding a wave of euphoria. S&P 500 lowered its credit rating for Netflix, attributing the cause to the company’s plan to invest in original programming. This is because creating original content is always a risky ordeal, and offers little to no guarantee of a profitable return.
Consider the Risks
With a current P/E ratio of 107.89, Netflix shares trade at 125 times 2015 earnings estimates—signifying the high expectations of investors. The company has a considerably large market cap of $28.2 billion, along with a P/S ratio of 5.02. Its P/B ratio of 14.85 shows that investors have valued this stock quite highly. As of Feb 14, 2015, the consensus forecast amongst 47 analysts covering Netflix stock was that the company would outperform the market in Q1 of FY 2015.
That being said, analyst estimates for the stock market aren’t always right; and there’s no such thing as a complete absence of risk. As with any other stock, you need to be aware of the best time to buy or sell Netflix shares. That’s the only way you’ll end up making a profit. Look to purchase Netflix stock at the trough, and aim to sell it at the crest.