Netflix (NFLX, Financial) has never been a valid choice for conservative value investors. At a forward price-earnings multiple of 81—five times the S&P 500’s—the $147 billion movie-streaming company has still some doubters to convince.
Netflix has always met and even exceeded both its own and Wall Street estimates in the past year. To no surprise, the strong performance has helped support its share price performance even in the tumultuous latter months of 2018.
Heading to its fourth-quarter report this Thursday, Netflix has slowly recovered from a deep 39% drop from its all-time high of $418.97 a share back in June to now about 20% down at $337.59.
The recent broader market rout may still have not helped Netflix bears as the movie-streaming company has returned a whopping 39.4% in 2018 having tremendously outperformed the broader S&P 500 that returned 4.38% total loss.
Netflix’s forecasts a further 27.8% revenue growth but a contrasting 44% drop in profits in its fourth quarter operations.
The company’s profit forecast is definitely a steep drop as this has at least not occurred in the past year. Netflix management reasoned out that margins will be lower brought by the timing of content spending and a higher mix of original films in the last quarter of 2018.
In review, Netflix is on track to outspend its planned spending on content by about $5 billion in 2018 for a total of $13 billion.
The company does expect continuous growth in its paid subscribers and projected a total of 7.6 million addition in the fourth quarter of 2018—a 15% increase from its previous year figure.
Netflix also carries a leveraged balance sheet with 1.6x debt-equity ratio as of September.
Minus China risks (Netflix is not available in China), Netflix presents a pure consumer play that eliminates the ongoing geopolitical issues between the two major countries.
Nonetheless, the upcoming Disney+ competitor and consistent selling of Netflix’s founder and CEO in recent months may bring more wariness to any Netflix investor.
(CEO Reed Hastings Selling Activities: here, here and here.)
Meanwhile, analysts have an average "overweight" recommendation on Netflix with a price target of $389.75.
For enterprising investors, Netflix current price-earnings multiples have never been this low since 2015. Further, the company is expected to jump back on its earnings growth following the recent quarter.
Disclosure: Long Disney.
