Netflix: A Valuation Update
Incredible business, long runway, and still a cheap stock
The last time I posted an update to my valuation of Netflix (Netflix: A Valuation Discussion, November 2023), I shared the several long-term scenarios and the following valuation summary exhibit:
For newer readers, I like to model several long-term scenarios because the future is uncertain and Netflix has a fairly wide range of outcomes. Then, I discount the cash flows in each scenario to come up with valuations that correspond to each scenario. This helps me get some understanding of what sort of assumptions might be baked in at varying price levels. As you can see above, the five scenarios I modeled last November spit out per-share equity valuations that ranged from $739 per share to $1,393 per share.
It might be natural to wonder how helpful a wide range like that is, but a wide range of outcomes necessarily results in a wide range of present values. To narrow down the range to something that might seem “more helpful” would be narrowing the possible outcomes to a level of forecasting precision that is less realistic. You might be able to do that with more mature businesses but it’s hard to do that with businesses that can realistically grow revenues and cash flows by multiples and potentially double operating margins over time.
Despite the wide range of outcomes and present valuations, the stock price last November was sitting meaningfully below the entire range. That is when I find things are most interesting and am comfortable owning a decent-sized position.
A Valuation Update
I recently updated my Netflix valuation. I’ve tweaked a few shorter term variables to the upside but nothing too material on a long-term basis has changed.
For example, Netflix’s UCAN segment added almost 4.0m paid subs year-to-date to reach 84.1m paid subs. In my last public valuation update, I had them reaching 83.1m at the end of 2024. So I’ve assumed they add another ~1m in each of the next two quarters to reach 86.1m at year-end. On the flip side, I reduced UCAN ARM growth to 5.5% from 7.0% as the currently lower monetization of the ad-tier acts as a headwind on consolidated ARM growth.
Assumptions for EMEA were left largely unchanged. I raised LATAM and APAC subs given outperformance in those regions versus my prior estimates. APAC ARM came down a bit.
Something worth noting is that my base case has Netflix’s penetration of broadband households in UCAN reaching 74% in 20 years, the end of my forecast period, but only in the low 40%s in the EMEA, LATAM, and APAC regions. LATAM already appears in that neighborhood, which implies Netflix’s growth there is solely tied to broadband household growth. These assumptions feel on the conservative side to me, but we’ll see. For starters, Netflix’s cheaper ad-supported tier that appeals to more price-sensitive consumers around the world is still in its infancy. And management may eventually offer a free ad-supported tier in some or all markets, which would eliminate price as a barrier for consumers globally. Consider how many users the large, global, free digital services have—Meta has 3.24 billion daily active people using its free services while YouTube is in that ballpark as well.
As for expenses, Netflix has been a bit more efficient than I had previously modeled so I passed that through to this year’s numbers. Overall, my long-term revenue went from $198 billion to $197 billion—essentially unchanged—and my long-term operating margin went from 57.3% to 57.9%.
Here is my PDF with all the assumptions across the multiple scenarios and the corresponding scenario-driven DCFs:
My valuation summary is below, which imports the valuations derived in the exhibit above.
As you can see, the current valuation range is $800 to $1,462 per share with a base case value of $1,164 per share. You’ll notice the whole range has shifted up since the last public update. Part of that is simply the passage of time while part is bumping numbers up slightly.
Fortunately, the current stock price is still sitting below the whole range, which makes me very comfortable holding the investment. Netflix is still less than 10% of TV screen time in the U.S. and even lower around the world. As linear gives way to streaming over time, Netflix’s already impressive engagement will only increase. Live events like the Tom Brady roast, weekly WWE events, Christmas Day NFL games, the live Netflix Cup golf tournament and more will only attract more viewers—and advertisers—around the world. And as we know, engagement in streaming is the primary driver of retention and pricing power.
It doesn’t seem too long ago that competitive streamers were going to “crush” Netflix as they pulled The Office and Friends off the service in favor of their own services. Netflix had a free ride for years but all that would be over now that these legacy media businesses were joining the party. Their extensive libraries of 20-year-old content would prove to be Netflix’s undoing.
What’s happened? Netflix has gained around 70 million paid members globally and revenue has increased from about $25 billion to probably $39 billion this year. Viewing of The Office and Friends on the other services has fallen from the sky. The legacy media streamers burned billions of cash on streaming before waiving the white flag, raising prices, removing content, and licensing content back to Netflix to help stop the bleeding. And Netflix now gets to pick through the carcasses of those 20-year-old libraries to essentially license what they want.
“The challenge for so many of our competitors is that while they are investing heavily in premium content, it’s generating relatively small viewing on their streaming services and linear continues to decline.” - Netflix 2Q 2024 Shareholder Letter
Disclosure: Long NFLX
Disclaimer: This post is for entertainment purposes only and is not a recommendation to buy or sell any security. Everything I write could be completely wrong and the stock I’m writing about could go to $0. Rely entirely on your own research and investment judgement.
Great update IE - and I'm excited for the 50%+ EBIT margins!