Netflix - Quarterly Valuation

May.25.14 | About: Netflix, Inc. (NFLX)

Summary

Netflix is suitable for Enterprising Investors following the ModernGraham approach.

The company is currently significantly overvalued.

The market is implying a very high earnings growth estimate of 73%.

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Enterprising Investor. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Netflix Inc. (NASDAQ:NFLX) fares in the ModernGraham valuation model.

NFLX Chart

NFLX data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - FAIL
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $345.09
MG Value $28.04
MG Opinion Overvalued
Value Based on 3% Growth $32.24
Value Based on 0% Growth $18.90
Market Implied Growth Rate 73.36%
Net Current Asset Value (NCAV) -$16.40
PEmg 155.21
Current Ratio 1.58
PB Ratio 13.99
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Balance Sheet - 3/31/2014

Current Assets $3,586,800,000
Current Liabilities $2,263,700,000
Total Debt $900,000,000
Total Assets $6,048,100,000
Intangible Assets $2,179,500,000
Total Liabilities $4,569,700,000
Outstanding Shares 59,940,000
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Earnings Per Share

2014 (estimate) $2.76
2013 $1.85
2012 $0.29
2011 $4.16
2010 $2.96
2009 $1.98
2008 $1.32
2007 $0.97
2006 $0.71
2005 $0.64
2004 $0.33
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Earnings Per Share - ModernGraham

2014 (estimate) $2.22
2013 $2.05
2012 $2.15
2011 $2.81
2010 $1.96
2009 $1.34
Click to enlarge

Conclusion:

Netflix is suitable for enterprising investors but not for defensive investors. The Defensive Investor has significant concerns regarding the low current ratio, the lack of dividend payments, and the exceptionally high PEmg and PB ratios. The enterprising investor is willing to accept more risk, though, and is only concerned with the lack of dividend payments. As a result, enterprising investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and its competitors through the ModernGraham Valuation Index. From a valuation side of things, the company appears to be very significantly overvalued after growing its EPSmg (normalized earnings) from $1.96 in 2010 to only an estimated $2.22 for 2014. This low level of demonstrated growth is in stark contrast to the market's implied estimate of 73.36% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is way below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Netflix Inc.? Where do you see the company going in the future? Is there a company you like better?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.