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Nicholas Kitonyi
Nicholas Kitonyi
Articles (404)  | Author's Website |

Netflix Has More Room to Run

The stock is up 14% after earnings

Shares of streaming company Netflix Inc. (NASDAQ:NFLX) gained 14% on Wednesday morning following the release of its most recent quarterly results.

The company reported its fourth-quarter and full-year 2020 earnings after the closing bell on Tuesday. While earnings failed to beat analysts' estimates, Netflix's subscriber growth and sales came in better than expected after surpassing 200 million subscribers.

The company's stock is now up more than 94% since March. Its current price-earnings ratio of about 93.76 suggests the stock could be massively overvalued based on the Peter Lynch fair value line of 15. However, Netflix's growth potential implies there could still be some room left to run in 2021.

Highlights from the most recent quarterly results

Netflix posted earnings of $1.19 per share, which fell short of the consensus Street estimate of $1.36. The company's top line came in slightly better than expected at $6.64 billion versus $6.63 billion.

The Los Gatos, California-based entertainment giant said it added 8.51 million new subscribers in the fourth quarter, which again outperformed the expected figure of 6.03 million.

Netflix's annual revenue grew 24% year over year to $25 billion after adding 37 million paying subscribers in 2020. Annual profit rose to $2.8 billion, aided by the subscription price increase in the U.S. and the U.K., among other regions.

Netflix is the market leader in premium streaming services and analysts remain optimistic that the company will continue to play a key role in the rapidly growing streaming media market.

The company's free cash flow for the year came in at $1.9 billion compared to a $3.3 billion loss posted in the prior year. This puts Netflix in a great position to continue producing high-quality content for its growing number of subscribers.

Valuation

From a valuation perspective, shares of Netflix trade at a trailing 12-month price-earnings ratio of 93.76, which is several levels above the Peter Lynch fair value. The company's forward price-earnings ratio of 56.82 is also considerably high.

However, when we factor in expected long-term earnings growth for the next five years, Netflix's PEG ratio of 2.12 is significantly lower than Comcast Corp.'s (NASDAQ:CMCSA) equivalent of 3.65. This could be attractive to growth investors.

The company is also one of the few entertainment stocks to post a positive bottom line over course of the last year. Some of its industry peers, including The Walt Disney Co. (NYSE:DIS) and Roku Inc. (NASDAQ:ROKU), failed to break-even in the trailing 12-month period.

In summary, Netflix appears to be expensively valued based on the Peter Lynch earnings line. However, its close peers are in even worse positions given their profitability levels over the last 12 months. Netflix appears to boast good growth prospects after again outperforming analysts' expectations on the number of new subscribers. This could be interesting to growth investors.

Disclosure: No positions in the stocks mentioned.

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About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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