5 min read

Is Netflix A Good Stock (to buy)?

If you haven't watched my previous video on Netflix stock crashing (after Q1 2021 earnings), I'd recommend watching it. But, I recap the most important parts in the most recent upload anyway.

Today, I just wanted to recap the Q2 2021 earnings and most recent talks and hopefully answer the question, "Is Netflix a good stock?".

In the last earnings release (Q1 '21) I made the following points:

  • Netflix is among the group of stocks which benefited from the pandemic, brining much of their anticipated demand forward into 2020.
  • Although the digital streaming market is growing, and Netflix is the leader in that space, competition is growing just as quick (if not quicker).
  • My price target for Netflix was $600 per share.
  • I wouldn't worry unless I saw a decline in subscriber growth.

The first two points – slower growth and increased competition – haven't changed in 3 months.

However, Netflix, for the second time in its history, had a net decline in UCAN (United States & Canada) subscribers. They lost a net 430K subscribers in their most profitable region. This is concerning. The last time this happened was in Q2 2019, where they lost 130K subscribers in the region.

NFLX Stock dropped as low as -30% after losing 130K subscribers in the UCAN region in 2019

Netflix stock, since then, has gone up 90% , its UCAN subscribers have gone up a net 11%, and its ARPU in the region has gone up 16%. So, if history repeats itself, the stock can suffer a lot of short-term pain (i.e. buying opportunities) for a significant upside potential. That's what I'll be watching for.

What is the upside potential for Netflix?

Management is currently developing gaming content on Netflix, which can be released as early as 2022. This can be a pretty big deal, but of course it's way too early to tell. Because this would be free for subscribers, it can help attract and keep subscribers on the platform. It should net increase margins, since they would do this out of their existing content budget, while they increase ARPU. However, it didn't appear that management knew for sure where this was going. It would be more of a test to see how it performs. I wouldn't bank on it.

The rest of the upside appears to be in developing regions, which isn't anything new. So, although I wouldn't put it pas them, Netflix needs to innovate to keep their current valuation and growth.

What is Netflix worth?

The last time I did this analysis, I looked mostly at PE ratio and earnings potential over the long term. When you look at the stock from that perspective, you can easily make the case for $600+ per share (which I did). However, I took a deeper dive on the DCF this time and wanted to point something out that changes a lot: content expenditure.

When you factor in the net investment in Content Assets each year, the Discounted Unlevered Cash Flow model has quite a difference in results.

This is quite alarming, because I don't anticipate Netflix being able to slow down its content spending at any given point. 2020 had a forced dramatic cut in spending only due to the pandemic. However, it's pretty clear that a cut in content spending would cause a decrease in paying subscribers – especially in a more competitive environment.

Analysts are expecting much higher Levered FCF, which are pretty far off from my calculations factoring in Content Expenditure.

Is Netflix a good stock to buy?

There is no question that Netflix is an expensive stock right, with a lot of negativity. It is arguably the lowest risk/reward play of the FAANG names right now. However, we do know that it should start producing positive cash flows and higher earnings going forward. It would finally be a mature company with lead market share in a growing industry. There is definitely a higher upside if it can be successful in the gaming niche. However, it will be a choppy ride that is arguably not worth the risk. If you own the stock, at this point, I would hold it. If you haven't bought in, I would look for opportunities at or below $480-500 should they present themselves.

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