Netflix (NFLX)

Netflix (NFLX)

Summary: Watch

Score: 13/20

MOS: 29%

Share Price: $687

Sticker Price: $973

Is Netflix stock a good buy?

The previous Tykr review on Netflix was completed on January 20, 2021. At that time the summary was as follows:

Summary: On Sale

Score: 17/20

MOS: 80%

Share Price: $507

Sticker Price: $2,535

Although the financials may be moving in the wrong direction, this review will provide a little context on why investors shouldn’t give up on Netflix if they already own the stock.

Netflix is a content platform and production company founded in 1997 and headquartered in Los Gatos, CA. They are a B2C (Business to Consumer) subscription platform charging prices between $8.99 and $17.99 (USD) per month. Keep in mind, prices may vary per country. Netflix is essentially a B2C SaaS (Software as a Service). SaaS is one of the most scalable business models on the market as consumers pay a monthly fee to use a service, in this case Netflix can be described as an entertainment streaming service. 

Here is a comparison of Netflix subscriber volumes against the competition. The old numbers are from January of 2021.

  • Netflix:  209 million paid subscribers. Up from 200 million. (5% increase).
  • Amazon:  175 million paid subscribers. Up from 150 million. (16% increase).
  • Disney+:  116 million paid subscribers. Up from 87 million. (33% increase).
  • HBO:  67 million paid subscribers. Up from 57 million. (17% increase).
  • Hulu:  43 million paid subscribers. Up from 30 million. (43% increase).
  • Apple TV+:  40 million paid subscribers. Up from 36 million. (11% increase).

Here is how many countries stream Netflix in comparison to other platforms.

  • Amazon: 200 countries
  • Netflix: 190 countries
  • Apple TV+: 107 countries
  • HBO: 50 countries
  • Disney+: 35 countries
  • Hulu: 2 countries (US and Japan)

Netflix is different from the competition because they are a global content generating powerhouse 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 on the estimated content creating budgets in 2021.

  • Disney+: $30B
  • Netflix: $17B
  • Amazon: $8.5B
  • Apple TV+: $6B
  • Hulu: $3B
  • HBO: $2B

Disney is spending more money on original content which is a result of big budget blockbusters such as Marvel films. For example, Marvel’s End Game had a production budget around $400M. Although Disney may spend more on individual projects, Netflix is still the winner when it comes to volume.

This article from variety.com states that Disney+ has over 7,500 TV episodes and 500 movies. Netflix on the other hand has over 47,000 TV episodes and 4,000 movies.

Although Netflix has been known for streaming content, they recently announced they will release video games. This article from appdevelopermagazine.com states that Netflix will release games in a way that will apparently flip the mobile gaming market on its head in two distinct ways. 

  1. There will be no in-game advertisements which is how a lot of game developers make money on games.
  2. There will be no need for in-game purchases, which is another way game developers make money on games.

By removing both advertisements and in-game purchases, Netflix is removing playtime friction which can be described as an annoyance by customers.

This article from variety.com states that Squid Game, a South Korean original, became the most viewed show on Netflix, at a staggering 1.65 billion viewing hours in 28 days. By comparison, the second most watched show on Netflix was Bridgerton which came in at 625 million viewing hours. This shows the impressive growth of original content production from around the world, not just the US.

This article from cnbc.com states that Netflix’s recent earnings report came in positive. Subscriber growth increased by 4.4 million in the most recent quarter compared to the estimate of 3.84 million. EPS came in at $3.19 compared to the estimate of $2.56.

This article from fool.com states that Netflix is about to start producing positive free cash flow in 2022. The leadership team at Netflix mentioned that Netflix will no longer need to raise external financing to run day-to-day operations. This is a major milestone for the Netflix, as it proves the early strategy of investing heavily in original content to grow members was the right move. 

This article from fool.com states that Netflix may have reached maturity in the US meaning that US subscribers are starting to slow. This is mainly because of competing platforms including Disney +, Apple TV+, Amazon, and HBO. But the announcement of adding video games opens up a whole new market. In fact, Netflix announced that Walmart will become a channel partner to help distribute video games to more customers globally.

This article from financialpost.com states that Netflix is fully aware that to increase the share price, they need to capture more subscribers outside the US. In fact, Netflix believes they can get to 450 million customers globally with its current business model of streaming TV shows, movies, and video games.

Now let’s take a look at the 4 M’s. A wise investor should always look past the numbers and look at the business.

MOS: The financials have slipped since January of 2021. This is primarily due to the growth of competitive platforms and slowed production schedule caused by Covid-19. A Score of 13/20 is still good but it’s down from 17/20. A MOS of 29% shows there is still some upside potential but it’s not as good as the 80% it was earlier this year. Keep in mind, an On Sale summary in Tykr is achieved when the Score is equal or greater than 10 and the MOS is equal or greater than 50%. 

Meaning: Netflix is indeed a global content producing powerhouse in countries all over the world. The impressive popularity of Squid Game has shown the world that creative content can be produced from countries outside the US. It’s important to note Squid Game season 2 production may start soon, which means we can expect more subscribers to join Netflix for that show alone. Aside from the rising success of South Korean productions, we can’t forget about Bollywood productions either. India produces a significant amount of content that is also popular globally. Films such as Baahubali: The Beginning (2015) and Baahubali 2: The Conclusion (2017) are both big budget epic action films that have captivated audiences outside of India. Aside from the streaming content, the addition of video games is a play that may spark a new wave of subscribers into the platform. If Netflix wants to reach 450 million global subscribers, video games may be the ticket to get there.

Moat: We know the threat from Amazon, Disney, Apple, and HBO will continue to grow. The only way to beat the competition is to continue to produce high quality original content.

Management: CEO, Reed Hastings Jr, has an impressive background. After high school he sold vacuum cleaners door-to-door. Anyone who’s sold anything door to door knows a lot about rejection and humility. Humility being a quality we want to see with good leaders. He also joined the Marine Corps which led to serving time in the Peace Corps. Thereafter he taught high school math to around 800 students in Africa. He quotes “Once you have hitchhiked across Africa with ten bucks in your pocket, starting a business doesn’t seem too intimidating.” He eventually got his master’s degree in computer science from Stanford University. He then worked for Adaptive Technology, a platform that helps debug software. Thereafter he started his first company, Pure Software, which also helps debug software. With Pure, they experience significant scale but he admitted his lack of managerial experience led to hiring issues. Growing through the pains of leading Pure was a critical milestone for learning how to lead a large company. In 1996 Pure merged with Atria Software and in 1997 Atria merged with Rational Software. Although Pure was a success on the surface, there were extensive growing pains that could have been avoided. Hastings then applied this knowledge forward and founded Netflix in 1997, which as some of you know, was originally a mail-order DVD service until it transitioned to a streaming service in 2007.

Now let’s take a look at the financials. A wise investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

2017:  $11.6B

2018:  $15.7B

2019:  $20.1B

2020:  $24.9B

Revenue has consistently increased year over year which is a great sign.

 

Net Income (Found on the Income Statement)

2017:  $558M

2018:  $1.2B

2019:  $1.8B

2020:  $2.7B

Net Income has increased year over year which is a great sign.

 

EPS (Found on the Income Statement)

2017:  1.29

2018:  2.78

2019:  4.26

2020:  6.26

EPS has increased year over year which is a great sign.

 

Free Cash Flow (Found on the Cash Flow Statement)

2017:  -$2B

2018:  -$2.8B

2019:  -$3.1B

2020:  $1.9.B

Free Cash Flow has significantly increased in 2020. This shows that Netflix no longer needs to raise capital or debt to produce original content.

 

Total Assets (Found on the Balance Sheet)

2017:  $19B

2018:  $25B

2019:  $33B

2020:  $39B

Total Assets have consistently increased which is another great sign.

 

Total Liabilities (Found on the Balance Sheet)

2017:  $15.4B

2018:  $20.7B

2019:  $26.3B

2020:  $28.2B

Total Liabilities have increased which is okay. As companies grow, they need to hire more employees. More employees means more liabilities.

 

Total Debt (Found on the Balance Sheet)

2017:  $6.4B

2018:  $10.3B

2019:  $14.7B

2020:  $16.3B

Total Debt has increased which is okay.

 

Total Equity (Found on the Balance Sheet)

2017:  $3.5B

2018:  $5.2B

2019:  $7.5B

2020:  $11.0B

Total Equity has increased year over year which is a great sign.

It’s important to note that Netflix does have some competition from Amazon, Disney, Apple, and HBO which may slow the stock growth but it most certainly won’t stop it. Knowing that original content will continue to be produced within other countries shows this stock does have some upside potential. On top of the streaming content, it’s important to pay attention to the video game segment. Future earnings reports should provide interesting data on the contribution to subscriber and revenue growth. I’m very interested to see how the Walmart partnership will impact video game distribution. If that strategy proves to be successful, Netflix may explore other large partnerships. 

If you enjoy watching great movies and TV shows, then Netflix is an easy business to understand. Although the stock summary is currently Watch, it has achieved On Sale in the past and it can certainly achieve it again. If you own this stock, I wouldn’t be alarmed with the Watch status. If you’re interested in owning this stock, it’s definitely worth a look.

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.