Sector experts, known for their smart (and often accurate) assessments, have fallen flat in the face of Netflix investors’ enthusiasm. For example, when net subscriber growth was less than expected in Q2’18, the share price dropped ferociously (current share price is 17% below peak valuation).Įxperts have remained behind the curve in predicting Netflix’s share price movement These fundamental and valuation weaknesses have made Netflix’s share price very sensitive and reactive to growth drivers. In addition, fundamental weakness can be seen in key financial metrics: the burgeoning net debt levels (Net Debt/EBITDA of 3.4x in 2017 and 2.7x in 2016), accelerating content liabilities ($7.5bn in 2017 $6.5bn in 2016 and $4.8bn in 2015) and consistent negative FCF yields (-1.9% in 2018E -1.3% in 2017 and -1.1% in 2016). However, the superlative growth in Netflix’s share price has resulted in unsustainable valuation multiples - 2019E PE of 78.8x, as against 32.4x for Tech peers (Alphabet, Amazon, AT&T and Facebook) and 14.3x for Content Peers (Disney, 21 st Century Fox, CBS and Comcast). The core reason for this phenomenal growth has been an exponential expansion in its international business, which now constitutes ~56% of total paid subscribers, and contributes ~50% of total revenue (as of 30 June 2018), making it a global business. It has delivered a total shareholders’ return at a CAGR of 21.7% since its IPO in 2002. Netflix’s share price has surged 81.6% YTD^, as against 16.2% by NASDAQ and 7.4% by S&P 500. However, Netflix’s stock performance has reignited this very basic question - what is more important for a share price acceleration, aggressive enthusiasm or fundamental principles of business analysis? Rational investors can often correctly differentiate between strong fundamentals and extreme optimism when it comes to predicting share price movements. Which shall prevail – understandable optimism or emergent financial weakness?
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