Sep 24, 2020
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Netflix Recovers 75% In 5 Months; Gone Too Far?

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(EDITOR S NOTE Image was created using multiple exposure in camera. ) In this photo illustration the. [+] NURPHOTO VIA GETTY IMAGES After more than a 80% increase since its March 16 lows of this year at the current price of around $550 per share we believe Netflix stock (NASDAQ: NFLX) has surpassed its near-term potential


Netflix stock increased from nearly $300 to about $550 off its recent bottom compared to the S&P which increased by around 57% from its recent lows. The stock outperformed the wider market through increased demand for streaming services through home confinement of people during the ongoing pandemic. Though NFLX stock dropped from $550 to $500 within per week following less than expected earnings in Q2 2020 it has recovered since and the stock price is significantly above the levels seen during 2017-2019


We believe the company s stock could decline by nearly 15% probably to be led by a drop in its P/E multiple as subscriber growth slows in the coming quarters. Our dashboard What Factors Drove 173% Change In Netflix Stock Between 2017 And Now? has the numbers behind our thinking


TREFIS Some of the stock price rise between 2017-2019 is justified by the 72% rise in Netflix revenues from $11. 7 billion in 2017 to $20. 2 billion in 2019 led by strong growth in streaming. This effect was further magnified by net income margins rising almost 2x from 4. 8% in 2017 to 9


3% in 2019. Netflix has been able to see this type of spectacular rise in profitability over the years as Netflix pays for its single largest expense – content – on a set cost basis i. e. for each piece of content that Netflix either licenses or self-produces it pays a set dollar amount despite what number of people watch it or how many subscribers the company has


Therefore each additional subscriber comes with very little extra cost and is therefore profitable. On a per share basis earnings increased by a whopping 230% led by a pointy rise in revenue and margins while shares outstanding increased only by 1. 4%. Higher earnings were somewhat offset by a drop in the P/E multiple which more than halved from 150x in 2017 to 75x at the end of 2019 as the stock price growth was less than the increase in EPS as Netflix started losing US streaming subscribers in 2019


However this trend was reversed with the multiple rising in 2020 and currently standing above 120x mainly through rising streaming demand due to the coronavirus crisis as people are spending more time in front of the TV thus giving a boost to demand for home entertainment options. What s The Downside Trigger? The global spread of coronavirus led to lockdown in various cities around the globe which led to higher demand for streaming services


This was reflected in the first two quarter numbers of Netflix for 2020. The streaming giant added 16 million subscribers in Q1 and another 10 million in Q2 taking the complete addition to 26 million in the first six months of 2020. To supply a perspective Netflix added 28 million subscribers in all of 2019


Q2 revenue touched $6. 1 billion a quarterly high for Netflix. Despite such an impressive subscriber and revenue growth Netflix stock dropped after the earnings announcement as Netflix reported earnings per share of $1. 59 about 12% less than both management and analysts had anticipated through the reporting of major non-cash charges that hit the lowest line


There are signs of gradual lifting of world lockdowns over recent weeks. Over the arrival weeks we think continued improvement prominent and subdued growth in the variety of new Covid-19 cases in the U. S. compared to the rate seen in April-May to boost market expectations. Additionally the gradual lifting of lockdowns is also giving investors confidence that developed markets have put the worst of the pandemic behind them


Following the Fed stimulus — which helped set a floor on fear — the market has been willing to glance through the present weak period and take a longer-term view with investors now mainly focusing their attention on 2021 results. PROMOTED UNICEF USA BRANDVOICE | Paid Program
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The 1st six months of 2020 looks a one-time bonanza as the management has hinted at subdued growth over the following few quarters. Additionally Netflix has left the door open for further hikes in prices for its offerings on a region by region basis. At a time when Netflix will have to face intense competition from new entrants like Disney AT&T and Comcast in the streaming war a hike in subscription fee could prove to be an ill-timed move


Also with investors focus shifting to 2021 numbers Netflix is not expected to copy its stellar performance of 2020 anytime soon and surely not in 2021 as fresh competition will try to eat into its market share. In a post-lockdown scenario when streaming demand is likely to come down from the levels seen during the last few months companies consisting of Roku are expected to fare better as most in their money comes in from advertising and commission


Additionally well-diversified companies like Disney also are expected to outperform as their business would not entirely depend on streaming. Subdued growth expectations rising competition and loss of diversification is anticipated to push Netflix s P/E multiple down nearly 80x which gives us a fair price estimate of $476 for Netflix s stock thus reflecting a downside of nearly 15% from its current market price


What if you re seeking a more balanced portfolio instead? Here s a top-quality portfolio to outperform the market with over 100% return since 2016 versus 55% for the S&P 500 Made from companies with strong revenue growth healthy profits numerous cash and low risk. It has outperformed the wider market year after year consistently


See all Trefis Price Estimates and Download Trefis Data here What s behind Trefis? See How It s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product R&D and Marketing Teams

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