➡️ This is a step-by-step stock review to determine if Netflix (NFLX) stock is a good buy. In this article, we’ll help you complete a 4M checklist. The 4Ms include the MOS (Margin of Safety), Meaning, Moat, and Management.
Table of Contents
➡️ Goal: It’s important to know the company’s history. This helps us understand the various revenue streams, if they acquired other companies, how they grew through difficult times, and how they separated themselves from the competition
- 1997: Reed Hastings and Marc Randolph co-found Netflix as a DVD-by-mail rental service. They believe that the traditional brick-and-mortar video rental model can be disrupted by using the internet.
- 1998: Netflix launches its website, offering a selection of DVDs available for rent. Customers can order DVDs online, and they receive them by mail.
- 1999: Netflix introduces a subscription-based model, allowing customers to rent unlimited DVDs for a monthly fee, without late fees. This proves to be a significant departure from the rental industry norms.
- 2000: Netflix approaches Blockbuster, the leading video rental chain at the time, with an offer to partner and run Blockbuster’s online rental service. Blockbuster rejects the offer.
- 2002: Netflix goes public at about $1 per share and lists on the NASDAQ.
- 2002: Co-founder Randolph left the company after the successful IPO.
- 2003: Netflix reaches one million subscribers and starts to turn a profit. The company continues to expand its DVD library and improve its recommendation algorithms.
- 2007: Netflix introduces streaming, allowing subscribers to instantly watch movies and TV shows on their computers. This marks a major shift in the company’s strategy and sets the foundation for its future success.
- 2010: Netflix expands its streaming service to be available on a wide range of devices, including gaming consoles, smartphones, and smart TVs.
- 2010: Share price breaks out past $10 per share.
- 2010: Top competitor, Blockbuster, delisted from the NYSE on July 1 as the stock was trading under $1. On September 23, they filed Chapter 11 bankruptcy due to the inability to pay off $900M in debt. Dish Network and Blockbuster partnered up to create Blockbuster Movie Pass but it was already too late. They were not able to keep up with Netflix. The company decided to close stores until the last remaining Blockbuster now resides in Bend, Oregon.
- 2011: Netflix separates its DVD-by-mail service into a separate brand called Qwikster, but the move faces backlash from customers and is quickly abandoned.
- 2013: Netflix releases its first original series, “House of Cards,” marking the company’s entry into content production. This move is followed by several other successful original shows like “Orange Is the New Black” and “Stranger Things.”
- 2016: Netflix expands its streaming service to over 190 countries, becoming a global entertainment platform.
- 2017: The company crosses the 100 million subscriber mark, solidifying its position as the world’s leading streaming service.
- 2019: Netflix faces increased competition in the streaming market as new players, such as Disney+ and Apple TV+, enter the scene. The company focuses on producing more original content to retain and attract subscribers.
- 2020: The COVID-19 pandemic leads to a surge in Netflix’s subscriber base, as people spend more time at home and seek entertainment options. The company continues to invest heavily in original content production.
- 2021: Netflix launches a new feature called “Netflix Gaming,” allowing subscribers to play a limited selection of video games through its platform.
- 2022: The company faces further competition from streaming services like Amazon Prime Video and HBO Max. To differentiate itself, Netflix expands into other forms of entertainment, including podcasts and live events.
- 2023: Netflix continues to innovate and adapt to the evolving media landscape, constantly expanding its content library, investing in new technologies, and exploring new business opportunities to maintain its position as a dominant player in the streaming industry.
➡️ Goal: When you look at a stock, the first step is to look at the financials. Fortunately, Tykr does this step for us automatically. A stock is either classified On Sale (Potential Buy), Watch (Hold), or Overpriced (Potential Sell). The higher the score, the stronger the financials and the safer the investment. The higher the MOS, the higher the potential returns you can make. To determine if a stock is a definitive “Buy” or “Sell”, it’s wise to complete a 4M checklist.
- Summary: On Sale
- Score: 67/100
- MOS: 89%
- Share Price: $435
- Fair Value: $1,592
- Revenue: $31.6B
How does Netflix make money?
➡️ Goal: It’s important to know how a company makes money. A mature business model has multiple streams of revenue which allow the company to weather downturns in the economy.
- Subscription fees: The primary revenue channel for Netflix is through monthly subscription fees. The plans in USD are as follows:
- Standard with ads: $6.99/month
- Basic: $9.99/month
- Standard: $15.49/month (Add extra members for $7.99/month)
- Premium: $19.99/month (Add extra members for $7.99/month)
- International expansion: Netflix generates original content in other countries. This is a key differentiator from other platforms such as Disney+, HBO, and Amazon.
- Original content licensing: Netflix generates revenue by licensing its original content to other platforms and networks. In some cases, Netflix produces shows or movies and sells the rights to broadcast or distribute them in specific regions or through different media channels.
- Advertising: Netflix added an ad-supported plan.
- DVD-by-mail rentals: While this revenue stream has significantly declined in recent years, Netflix still offers a DVD-by-mail rental service in the United States. Subscribers can choose DVDs from a vast catalog, and Netflix generates revenue through rental fees and DVD shipping charges. However, this revenue channel will be discontinued in September of 2023.
- Partnerships with telecommunications companies: Netflix forms partnerships with telecommunications providers to offer bundled subscription packages. In such arrangements, customers can access Netflix as part of their existing telecom subscription, and the telecom company receives a share of the revenue.
- Partnerships with streaming devices and smart TVs: Netflix collaborates with manufacturers of streaming devices, smart TVs, and set-top boxes to pre-install the Netflix app or provide easy access to the platform. These partnerships often involve revenue-sharing agreements.
- Product placement and brand integrations: Netflix incorporates product placements and brand integrations into its original content, allowing brands to reach a large audience. These partnerships generate additional revenue for the company.
- Merchandise sales: Netflix capitalizes on the popularity of its original shows and characters by selling merchandise, such as clothing, accessories, and collectibles. Fans can purchase items related to their favorite Netflix shows, contributing to additional revenue.
- Theater releases: In some cases, Netflix releases its original movies in theaters for a limited time before they become available on the streaming platform. Revenue is generated through ticket sales during the theatrical release.
- Ancillary content distribution: Apart from streaming movies and TV shows, Netflix also distributes ancillary content, such as soundtracks, behind-the-scenes documentaries, and companion books. These additional content offerings provide opportunities for additional revenue.
- Other ventures: Netflix explores various other revenue-generating ventures, such as live events, interactive experiences, and co-branding initiatives. These endeavors aim to leverage the popularity of Netflix’s content and engage with fans in different ways.
➡️ Goal: It’s important to understand who the competitors are and how their financials rank against this company. Try to find 5 other competitors to rank against based on Score. The best way to find competitors is to Google “XYZ competition” and replace XYZ with the company name. You can also go to Tykr and click on the “Similar Stocks” tab on each stock to see similar companies in the same industry.
Here is a comparison of Netflix subscriber volumes against the competition.
Netflix (NFLX)
- Summary: On Sale
- Score: 67/100
- MOS: 89%
- Share Price: $435
- Fair Value: $1,592
- Revenue: $31.6B
Top 5 Competitors of Netflix
Apple (AAPL)
- Summary: On Sale
- Score: 61/100
- MOS: 75%
- Share Price: $183
- Fair Value: $398
- Revenue: $394B
Amazon (AMZN)
- Summary: Overpriced
- Score: 39/100
- MOS: 0%
- Share Price: $123
- Fair Value: $100
- Revenue: $513B
Disney (DIS)
- Summary: Overpriced
- Score: 45/100
- MOS: 0%
- Share Price: $93
- Fair Value: $108
- Revenue: $82B
Comcast (CMCSA)
- Summary: Overpriced
- Score: 39/100
- MOS: 0%
- Share Price: $40
- Fair Value: $38
- Revenue: $121B
Warner Bros Discovery (WBD)
- Summary: Watch
- Score: 61/100
- MOS: 0%
- Share Price: $12
- Fair Value: $14
- Revenue: $33B
Here is a comparison of Netflix subscriber volumes against the competition.
- Netflix: 232 million paid subscribers.
- Amazon: 200 million paid subscribers.
- Disney+: 157 million paid subscribers.
- HBO: 96 million paid subscribers.
- Paramount+ and Showtime: 62 million paid subscribers.
- Hulu: 40 million paid subscribers.
- Apple TV+: 25 million paid subscribers.
- Peacock: 21 million paid subscribers.
Here is how many countries stream Netflix in comparison to other platforms.
- Amazon: 200 countries & territories
- Netflix: 190 countries
- Apple TV+: 107 countries
- Showtime: 60 countries
- Peacock: 60 countries
- HBO: 50 countries
- Disney+: 35 countries
- Paramount+: 10 countries
- Hulu: 3 countries (US, Puerto Rico, and Japan)
Netflix is different from the competition because they are a global content-generating machine that not only produces unique content for US Citizens but also unique content for citizens within other countries. Some of those countries include but are not limited to the following.
- US
- Canada
- Brazil
- Argentina
- Chile
- Australia
- India
- South Korea
- Japan
- Mexico
- Spain
Here is a comparison of the estimated content-creating budgets in 2022.
- Disney+: $33B
- Netflix: $17B
- Amazon: $16B
- Apple TV+: $6.5B
- HBO: $2B
➡️ Goal: It’s important to understand who the CEO is, what they have accomplished in the past, and how they have helped this company grow. As investors, we should invest in CEOs with humility and integrity. Good leaders typically have stronger cultures, less turnover, and better returns in the stock market.
In January of 2023, Founder, Reed Hastings, has announced that he will step down from co-CEO and move into the role as Chairman. Co-CEO Ted Sarandos will be joined by Greg Peters as Co-CEO. Greg Peters previously served as COO and Hastings, Sarandos, and Peters have worked together at Netflix for 15 years.
Sarandos had the early foresight and skill to push into original programming, changing the company’s trajectory. He then moved quickly to expand into international originals, film, animation, and unscripted — bets that have helped broaden our content slate and which took courage given all the skepticism.
Peters has been instrumental in driving partnerships, building and launching advertising, rebuilding the talent within the organization, and helping strengthen the culture. He also spent several years in Japan, launching early efforts in Japanese originals as the country’s general manager, and is currently building the game’s initiative.
Hastings will be a bridge from the board to the co-CEOs.
- The Glassdoor rating is 4.3.
- The Glassdoor CEO approval is 91%.
➡️ Goal: It’s important to highlight important company-specific news as well as industry-specific news over the last month and year. We don’t need daily news on a company to make buy or sell decisions because we’re investors, not traders. Overall, we want sufficient news to understand where a company and industry are heading over the next year or few years.
This article from spglobal.com states that 10% of Netflix’s revenue is now generated by ads. Netflix has a new Basic with Ads plan for $6.99/month. For comparison purposes, Disney + has an ad-supported plan for $7.99/month.
This article from npr.org states that Netflix will discontinue mailing DVDs to customers by September 29th, 2023. The DVD mail service generated $145.7 million in 2022. People still enjoy the DVD mail service because some TV shows and movies are not available on digital which motivates people to order the DVDs. As of today, Netflix has mailed over 5 billion DVDs in the US, which is the only country that supported the DVD mailing service.
This article from cnbc.com states that Netflix crackdown on password sharing is paying off! The company has reported nearly 100,000 signups in two days, after May 23, 2023, when Netflix sent the email notification to users. The email stated that users can create a new membership or pay an extra $7.99/month fee to add people to their plan, that live outside the house. Netflix states that over 100 million households were sharing accounts, which is about 43% of its global user base. This was limiting revenue for Netflix which in turn which limiting the company’s ability to produce new content.
Some of the top Netflix shows and moves coming in 2023 include:
- Stranger Things Season 5
- Extraction 2
- Rebel Moon – This article from variety.com states that Rebel Moon will be a two-part series and each part will have two cuts. A cut appropriate for all ages and a more explicitly cut that gives Snyder fans the true Snyder style we’re all looking for.
➡️ Goal: All of our homework on this company leads up to the 4M checklist. A lot of investors only look at the numbers. Yes, it’s important to look at the first M (MOS) which is the math part of investing but it’s also important to look past the numbers and also look at the business, the competition, and the management. If all 4Ms pass, we should have high confidence in buying this stock.
✅ MOS: The financials are very good. The score of 67/100 shows us this company is operating well and the MOS of 89% shows there is a lot of upside potential.
✅ Meaning: In April of 2022 I did a review of Netflix and said both the password lockdown and password sharing would benefit the company and its shareholders. That indeed has come true as the share price is up 47% in 2023.
✅ Moat: There are a lot of competitors in this industry but the advertising and password lockdown were the critical moves to help Netflix separate from the pack. The additional revenue will help fuel original content production in hot markets such as South Korea and India.
✅ Management: I’m not always a big fan of a duo CEO situation but the responsibility breakdown between Sarandos and Peters makes sense. As long as their roles don’t overlap, they should continue to grow this company and help increase the share price.
8. Is Netflix stock a good buy?
All 4Ms pass. I would definitely add this stock to my portfolio. Now that Netflix has added advertising and the password lockdown, they have room to grow for the next few years.
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The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
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