Netflix (NASDAQ:NFLX) has continued to move towards all-time highs, pushing its market capitalization past $250 billion. The company has been buoyed by the unexpected popularity of its ad-supported tier as the company rehashes the reasons for cable, both through ads and channel availability. As we’ll see throughout this article, the company is overvalued making it a poor investment.
Netflix Quarterly Results
The company saw revenue continue to grow as it returned to YoY growth. Growth hit the double-digits, supporting income.
That’s been supported by a massive growth in paid memberships to 16.5% YoY as the company has added millions of memberships on a monthly basis. The company has been supported heavily by its ad-supported tier as it’s returned to effectively what the company was trying to remove with cable providers.
That has enabled FCF for the company to remain stronger, and less volatile, however, annualized FCF, mostly going towards share buybacks is still only ~$6-7 billion. That puts the company at a FCF of 2-3%. Netflix has more than 40 million subscribers on its ad supported tier, rapid growth in less than two years, and highlighting the popularity of the tier.
Still, with a market capitalization of more than $270 billion, the company needs to justify its valuation. It needs substantial growth going forward.
Netflix Screen Time Share
The company has maintained a reasonably strong share of screen time, but competition is increasing.
For perspective, in July 2022, streaming was 34.8% of U.S. screen time and Netflix made up 8% of screen-time with 7.3% going to YouTube / YouTube TV. Prime Video was at 3%, Disney+ at 1.8%, and Max at 1%. Since then, streaming has grown its share of the market, to 40.3%, taking up an extra 5.5% of the market.
However, YouTube has actually grown the most, going to a 9.9% share. Netflix has grown slightly, gaining 0.4% in total share, but that’s the same as Max. Disney+ has grown, and additional streaming services have become more relevant, such as Paramount+ and Peacock. Cable has taken a big hit too, while broadcast has taken a minor hit and Other has grown.
There is a limit to how large streaming can grow, and it’s worth noting that as competition remains strong, we expect Netflix’s gain in market share to be minor.
Netflix Shareholder Return Potential
Netflix is focused on driving shareholder returns, with forecast FCF at just over 2% and share repurchases.
The problem is the company isn’t sitting on a pile of cash (almost $8 billion in net debt) and its FCF yield is just over 2%. The company needs to see FCF grow to 4-5x its current level once growth stops to justify its valuation. That’s a tough prospect for a company that’s already ubiquitous with 280 million total subscribers.
It’s also tough for a company that’s already holding on to 8.4% of the viewership. That conundrum is why we see the company as overvalued without having a path to justifying its valuation.
Thesis Risk
The largest risk to our thesis is the company’s return to growth and the potential earnings from an advertising business. That could result in the company’s FCF growing faster than we expect, which could enable it to drive long-term shareholder returns at a faster rate than we expect.
Conclusion
Netflix is an overvalued company. The company is a great company with a great product, but at a valuation of more than $270 billion, it doesn’t have the FCF to justify its valuation. It’s expected annualized FCF for 2024 is $6 billion, just over 2%, and the company continues to have a net debt position. The company is slowly buying back shares.
As a result of these things, we think the company is an overvalued investment at this time.
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