The stock of Netflix (NAS:NFLX, 30-year Financials) is estimated to be modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $503.84 per share and the market cap of $223.4 billion, Netflix stock shows every sign of being modestly undervalued. GF Value for Netflix is shown in the chart below.
Because Netflix is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 28.1% over the past three years and is estimated to grow 15.88% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Netflix has a cash-to-debt ratio of 0.54, which ranks in the middle range of the companies in the industry of Media - Diversified. Based on this, GuruFocus ranks Netflix's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Netflix over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Netflix has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $26.4 billion and earnings of $8.27 a share. Its operating margin is 21.17%, which ranks better than 88% of the companies in the industry of Media - Diversified. Overall, the profitability of Netflix is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Netflix over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Netflix's 3-year average revenue growth rate is better than 91% of the companies in the industry of Media - Diversified. Netflix's 3-year average EBITDA growth rate is 29%, which ranks better than 81% of the companies in the industry of Media - Diversified.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Netflix's ROIC was 13.42, while its WACC came in at 6.22. The historical ROIC vs WACC comparison of Netflix is shown below:
In short, Netflix (NAS:NFLX, 30-year Financials) stock is believed to be modestly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 81% of the companies in the industry of Media - Diversified. To learn more about Netflix stock, you can check out its 30-year Financials here.
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