Pros
– Paramount/WBD merger creates a highly leveraged competitor with questionable management.
– Strong FCF and balance sheet
– Best in class brand equity
– Trading below historical norms ( PE ).
– Continued tailwinds in Emerging/Frontier markets
– AI lowering production costs
– Strong management (pioneering talent density).
Cons
– Amazon Prime and their massive scale
– Younger cohorts increasingly gaming and watching UGC content
– Saturated developed markets
– Uncertainty regarding product expansion/changes to product mix
– Removal of KPI’s such as semi annual watch time
Summary
Ad tiers to drive increased adoptions in emerging/frontier markets. Clear path for AI to improve margins. Plausible market share gain in short term, as competition must improve balance sheet. Development of AD monetisation infrastructure to decrease margins in short term. Netflix is cheap based on historical averages – by some margin, attributable to removal of KPI’s, changes to monetisation and fears of market saturation. The market is increasingly viewing Netflix as a mature media conglomerate instead of as a hyper growth story. If Netflix can maintain high single digits growth, then the current valuation is attractive.
notes:
I think AD tiers was a very deliberate initiative to increase reach to emerging/frontier markets. One could fear this would impact margins, as the subscription base grows outside developed nations (lower arpu). Though, the low incremental costs of each new customer, properly offsets this.
Netflix is required by law to have 30% local produced content. This creates a moat for new entrants, but levels the playing field with incumbents. Note. Amazon & HBO/Paramount has wide access to local content, due to their ownership of local studios.
Quality companies typically trade at a premium.
And PE 20 is that.
Netflix has over a 10 year period consistently improved margins and grown revenue – while it is not a indicator for future performance, it is certainly pointing towards excellent management. Also the company exhibits quality indicators such as massive FCF, profitability and a solid balance sheet. Thus Netflix command a premium valuation.
Profitability:
Gross margin = 49%.
Net income margin = 24%.
Return on assets = 15%.
Liabilities:
Liabilities/assets = 52%.
EBITDA/Interest = 18.5
2026 PE = 20x.
2026 EV/FCF = 24x.
Analyst expectations:
2026 PE = 20.4x
2027 PE = 19.2x
2028 PE = 16x
2026 guidance is 13-14% revenue growth (12% FX neutral) and a operating margin of 31,5%.
A 10 year DCF; exit multiple 20, revenue growth 10% and operating margin improving 0,25% yoy.
> 6% discountrate. Fair value 115 USD.
> 8% discountrate. Fair value 85 USD.
> 10% discountrate. Fair value 81 USD.
Netflix is my second biggest investment at around 15% of portfolio.
Not financial advice. I can have made mistakes. Always do your own due diligence.
Leave a Reply