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Sunday, April 18, 2021

Investment Opportunity: NFLX Stock Falls 11% In One Month

Despite rising by 64% since March, NFLX stock still can go up. NFLX stock rose from $299 – $491 in comparison to a 60% rise of the S&P 500. This outperformance was due to an increase in demand for streaming services during COVID-19 when everyone is just locked in their houses. But NFLX stock dropped by 11% due to missed targets in Q3. Despite increasing from 50% off its 2020 level(December), expectations of a further rise in improving earnings and streaming demand will increase the price. But due to the lift of lockdown, there will not be a sharp spike in price. Thus there will be a 4% – 5% marginal growth increase in the coming terms.

How Is The NFLX Stock Doing In Recent Times?

The rise in NFLX stock price by 72% between 2017 and 2019 is due to the increase in the company’s revenues ($11.7bn in 2017- $20.2bn in 2019). This was amplified by the doubling of income margins from 4.8%(2017) to 9.3%(2019). This led to a whopping 230% rise in earnings and a 1.4% rise in shares outstanding. Netflix also earned a massive rise in profitability by paying a fixed amount for the content.

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Due to the loss of US subscribers, the growth of NFLX stock price was lesser than EPS increase which led to a drop in P/E multiple (150x-75x). However, the recent number is 115x due to higher streaming demand in the COVID-19 crisis.

Future Of NFLX Stock

The rise in demand was seen in the 1st two quarters of 2020 thereby adding 16M subscribers(Q1) and 10M subscribers(Q2). Netflix caught 28M subscribers in 2019 and 26M subscribers in 2020(1st 6 months). Revenue for Q2 was $6.1 billion, a one-time high. After that, there was a fall in revenue and earnings due to lifting in lockdowns.

The recovery and the timing of recovery depend on how the virus spreads are contained. Our dashboard covers the spreading process of the coronavirus in the United States of America in comparison to Brazil and Russia. Netflix is still the leader in streaming services but facing competition from players like AT&T, Comcast, and Disney. The probability of a rise in rates of subscription next year can lead to volatility of NFLX stock prices for the coming months. Rising competition, growth expectations, and fall in diversification can make the P/E multiple near to 60x. But growth in earnings and margins in 2021 can offset this P/E drop and lead to a price spike in NFLX stock. Trefis’s Netflix valuation is $510, which is slightly more than the recent market price.

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Netflix has a portfolio of high quality with a 100% return from 2016 versus the S&P 500’s 55%. Consisting of units with high revenue growth, abundant cash, low risk, and healthy profits, Netflix has been an outperformer in the market for years consistently.

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