Share Netflix (NFLX): bright future despite strong competition

Business overview and investment thesis

Netflix Inc. (NASDAQ:NFLX) operates one of the largest subscription-based video streaming business models, meaning the company generates revenue by charging its customers a monthly or annual fee for access to its TV series and films in a wide variety of genres and languages. NFLX operates in more than 190 countries and provides its customers with content they can access anytime, anywhere and on any device with an internet connection. NFLX customers can choose from a variety of plans, including the new and cheaper ones Advertising model which allows customers to access the platform at a discounted price. With over 230 million paid memberships, NFLX is a very successful company in the growing video streaming market.

Since peaking its market valuation in late 2021, when it hit the $300 billion mark, the company has saw a substantial drop from its current market valuation of $140 billion. The market has penalized NFLX due to a slowdown in subscriber growth and intense competition in the space with leading technology companies such as Amazon (AMZN), Disney (DIS) and Warner Bros. Discovery (WBD), etc. make large investments to gain market share. Despite these headwinds, NFLX continues to evolve its strategies to gain more subscribers and increase revenue, which is visible with the company‘s recent deployment of its ad revenue model. Moreover, the expected market size for the streaming services market ~$137 billion by 2027, giving NFLX a long runway for growth. This opportunity combined with the significant drop in valuation has placed NFLX stock in an attractive position for a long-term investment opportunity. To leavedive into the businessthe finances.

Financial Overview

As mentioned earlier, NFLX generates revenue through its subscription-based model, where customers pay a monthly or annual fee to access the streaming service. In 2022, NFLX increased sales to $31.6 billion, representing a 6.5% increase over the previous year. The revenue increase was largely driven by the addition of approximately 9 million subscribers in combination with membership price increases during the year. Despite this increase in turnover, the company remains‘s operating profit fell to $5.6 billion compared to $6.2 billion in FYE 2021. This decrease was due to higher operating expenses due to acquisition, licensing and content production costs. It is important to note that most market players have invested heavily in content in the year 2022. For example, AMZN has invested $7 billion by 2022 just in Amazon Originals, live sports, and third-party licensed video content. These results led NFLX to report a profit of $4.5 billion for the year, representing a profit margin. of 14%.

NFLX’s cash flow from operations in 2022 was $2 billion, while free cash flow totaled $1.6 billion. This is a nice improvement over last year when the companycash flow from operations was not sufficient to cover capital expenditures. This cash generation helped NFLX strengthen its balance sheet by paying back $700 million in debt while also investing $900 million in short-term investments. As a result, the company reported a cash and cash equivalent position of $6.1 billion and a decrease in its net debt position to $10.9 billion.

Performance by geography

In terms of revenue by geography, the United States accounted for 45% of total revenue, with the rest of revenue coming from EMEA (Europe, Middle East and Africa) at 31%, LATAM (Latin America) at 13% and APAC (Asia-Pacific) at 11% of total revenue during FYE 2022. This geographic diversification helps NFLX reduce the risk of being overly regionally dependent. The table above shows that the LATAM and APAC regions saw the highest percentage increase in revenue, while paid memberships across all regions saw a slowdown compared to 2021. It will be interesting to see how the new advertising model performs in all regions as NFLX focuses this initiative on major countries including the United States, Brazil, Mexico, Japan, United Kingdom, France, Germany, Korea, Spain, Italy, Australia and Canada.

Competition

For a long time, Netflix was to some extent the only game in town for streaming services, but this has changed in recent years as the market sees large capitalizations and well-funded companies entering the market. These companies include Disney, Warner Bros. Discovery, Amazon, Apple (AAPL), Paramount Global (PARA), etc. All these competitors have invested heavily in their platforms and have a lot of experience developing great content. As such, we now have a competitive market. However, it should be mentioned that this is not a winner takes all market, there is room for multiple players to compete. For reference, a Civic Science study found that approximately 81% of subscribers have 2 or more video streaming subscriptions at the same time. Nevertheless, these companies compete for consumer time and consumer money, so providing great content is paramount.

The result of the competition over the past few years has resulted in NFLX losing market share to the various competitors in the space. As of December 2022, NFLX is still the most dominant player in the market, according to Just Watch, but Prime Video and Disney+ are both very close to NFLX and continue to invest heavily in their platforms and content. Furthermore, Disney will also offer an advertising subscription that should help to increase the number of subscribers. On the other hand, Amazon continues to pour money into Amazon Prime, with the company investing $7 billion in Amazon Originals, live sports and third-party licensed video content by 2022.

Video streaming market opportunity

The streaming market is becoming more and more relevant in different markets. The beauty of video streaming services is that it is a personalized service that leads to a better customer experience. As mentioned earlier, the streaming video market is highly competitive with companies investing heavily in producing original content and acquiring the rights to popular TV shows and movies to attract and retain subscribers. However, this is not a winner takes all market, the opportunity for several companies to flourish at the same time is quite high as people usually want to have more than one subscription at a time. With the market expected to grow to $137 billion by 2027, there is still room for growth for all market players. In addition, companies are trying new ways to generate revenue, such as advertising for a discounted price. This should help businesses increase revenue as people can see more bang for their buck.

valuation

NFLX has experienced significant volatility over the past two years, reaching its peak market valuation of $300 billion in late 2021. The bullishness was short-lived when the companyThe company’s market valuation fell more than 75% to $74 billion within six months. Since this low point, the company has seen a market value increase of almost 100% to $140 billion. Investors could have been caught up in the decline or benefited from the bottom, regardless of whether these fluctuations pose a significant risk to investors.

At current market valuation, the company’s multiples have a price to cash flow of 66.8x and a price to sell of 4.2x. For the valuation of the company, I used the market multiple method, with future earnings forecasted up to a multiple of 25x. It should be noted that this is a low multiple compared to what the company has traded in the past, which is why I think it’s fair. I’ve obtained the analysts’ earnings forecast from Seeking Alpha data and have applied a net profit margin that gradually approaches 20% by the end of 2026. This should be achievable as the company should be able to become more efficient as it continues to grow. With these numbers, I arrive at a market valuation by FYE 2026 of $233 billion. It is important to understand that this is based on estimates and assumptions that are subject to change. In fact, the company could return to its highest rating, but I always try to be conservative.

Risks

Strong competition

As mentioned in the article, NFLX faces stiff competition from other streaming services such as Amazon Prime Video, Disney+, HBO Max, and others. Increased competition can lead to higher operating costs, a decrease in subscriber growth and price pressure. All of this could negatively impact NFLX’s financial performance.

International expansion will bring challenges

Netflix is ​​expanding globally to more than 190 countries, bringing challenges such as adapting to different cultures, languages ​​and regulations. While this expansion is an opportunity to generate higher revenues, it can also lead to higher content costs, currency risks and operational challenges.

Currency risks

NFLX generates a significant portion of its sales from outside the United States, with currencies denominated other than the US dollar accounting for 56% of sales in 2022. As a result, NFLX is exposed to currency risk, for reference the company reported that the revenues would have been about $1.8 billion higher if foreign currency exchange rates had remained constant compared to 2021. These risks are visible not only in revenues, but also in costs, as NFLX operates in several regions at the same time . Management will need to continue to implement efficient strategies to mitigate this risk.

Conclusion

In summary, Netflix primarily generates revenue through its subscription-based model and has demonstrated strong financial performance in terms of revenue growth, operating cash flow and free cash flow. The company faces competition from other streaming services, but remains one of the top players in the market. Netflix’s strong balance sheet, focus on international expansion, new ad revenue model, and dominant position in the growing video streaming market, which is expected to grow to ~$137 billion by 2027, provide a solid foundation for growth. These factors, coupled with the drop in market valuation, have put NFLX in an attractive position for a long-term investment. As such, I believe NFLX stock currently presents a buying opportunity.