Netflix Stock: Trading at lowest multiple in a decade (NASDAQ: NFLX)



The following segment is taken from this funding letter.


Netflix had a strong quarter, with shares appreciating over 30%. The stock had simply become too cheap during the second quarter, with shares trading at around 16 times earnings. It was by by far the lowest multiple on the stock in a decade. This below-market valuation was irrational for the world’s dominant streaming platform.

Although near saturation in some markets, Netflix continues to grow. After two small consecutive declines in subscribers that spooked investors, the third quarter brought growth of 2.4 million subscribers and a guide to more than 4 million in the fourth quarter. Excluding currency effects, revenue grew 13% in the third quarter, driven by revenue per member growth of around 8%. While the strong dollar remains a headwind, we see several big bright spots for Netflix going forward.

  • Further price increases. We remain convinced that Netflix, at least in the US, is under-monetized relative to usage. We believe the company will continue to increase revenue per user in the ad-free tier.
  • Expenditure resizing. Netflix, and the streaming industry in general, have been spending money like drunken sailors over the past five years. For Netflix, that meant billions in cash outflows; for their peers, that meant billions in operating losses. But that era is coming to an end, with Netflix saying in its Q2 letter that they have “adjusted their cost structure to reflect the current rate of revenue growth.” Competitors are also cutting expenses.
  • Advertising deployment. Netflix recently announced the rollout of an ad-supported tier ($6.99 in the US) starting November this year. As we put it in Q1: “Advertising is a large part of Hulu’s business, with eMarketer estimating that Hulu generated $3.1 billion in ad revenue in 2021. Netflix’s ad business has the potential to be multiples of that size, as Netflix average more than twice Hulu’s share of total US TV We suspect that given their technical skills, ability to recruit talent, and TAM of the opportunity, Netflix will be able to create quickly a world-class programmatic advertising business that will bring substantial additional subscribers and revenue. Finally, Netflix will be directly compensated – at least in the ad-supported level – for the considerable amount of time its subscribers spend using the service, which accounts for 7-8% of total TV viewing in the US and UK. We expect the ad-supported level to generate tens of millions of new subscribers over the next few years and generate billions in profits.

With its top-notch management, infrastructure, scale, and content, we believe Netflix will continue to grow revenue and margins for the foreseeable future.

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Sources: Bloomberg Finance LP, Interactive Brokers LLC, S&P Compustat, Bireme Capital LLC.

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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