Fresh off of recent upgrades, Netflix (NFLX) and DIRECTV (DTV) have both performed well for investors in 2013. This article will take a look at the fundamentals of the two to help investors determine which one deserves a closer look and possible investment.
Netflix is one of the largest internet subscription video streaming companies in the world with over 33 million members in 40 countries. Last year alone, domestic memberships grew by 5 million (up 25% from 2011). Due to this great increase, NFLX has had one of the best performances in 2013. YTD, shares are up approximately 105% and trade at their 52 week highs of $190.61.
Yesterday, Pacific Crest's Andy Hargreaves made a bold prediction by lifting the price target of this already high-flying stock to $225 from $160 per share. In the release, the Pacific Crest analyst said that he expects:
Netflix's U.S. streaming business to hit 36 million subscribers by the end of 2015. He expects the international segment to hit 17 million subs and sees operating margin hitting 14%.
While increased memberships definitely seem possible based on the ease of growth Netflix has had in the past. NFLX's success has not been unnoticed and increased pressures from its competitors such as Amazon (AMZN), Apple (AAPL), Google (GOOG), Time Warner (TWX), Comcast (CMCSA), and DIRECTV (DTV) have put doubt on Netflix's growth sustainability. Because of this, the mean target for NFLX shares is currently at $139.04 with the median target price of $131.00, both substantially below the current share price and the Pacific Crest's recent estimate.
Fundamentally, Netflix's balance and income statement also lead me to conclude that the current market cap of $10.67 billion is supported more by future revenue and subscription growth than its current financial position and earnings.
Current P/E of 625 is above the industry averages 59.5.
P/B of 13.6 and P/S of 3.0 are also substantially above the industry averages 4.8 and 1.3, respectively.
Operating margin of 1.4% and net margin of 0.5% are below the industry averages 4.4% and 4.2%, respectively.
While revenue has grown significantly over the past few years, so has the cost of it. So much so that net income for 2012 was only $17 million. And, these numbers are not clouded by non-cash depreciation or amortization expenses, as evidenced by operating cash flows of only $23 million.
DIRECTV had approximately 20 million U.S. customers at the end of February and approximately 15 million in Latin America. With a market cap of $32.59 billion, DTV is up 13% YTD and also trades near its 52 week high of $56.86 per share.
Below are some positives for DIRECTV:
Strong cashflows from operating activities have brought in over $5 billion in each of the past two years.
DIRECTV has repurchased over $5 billion in shares in each of the past three years.
Current P/E of 12.2 and P/S of 1.2 are both below the industry averages 16.3 and 1.5, respectively
DTV's net margin of 9.9% is above the industry averages 6.7%
While both Netflix and DIRECTV have been able to grow subscriptions and revenues, only DIRECTV has been able to also grow cash flows and earnings. Investors have the benefit of not having to invest in every opportunity that comes by. And due to the fundamentals of Netflix, the current valuation and recent earnings upgrade appear to be overly optimistic and supported by future revenues rather than the bottom line.