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Category: Stock Market and Netflix (NFLX)
Date: 20 January 2021 Stock Price of Netflix: $501.77 We take a look at the 4th quarter earnings release of their 2020 fiscal year of Netflix, the world's leading internet entertainment service group with over 203 million paid memberships (up by 8.5 million subscribers for the latest quarter). The group recorded revenue of $6.64 billion in the 4th quarter of their 2020 fiscal year and net income came in at $542 million. The stock of Netflix is up sharply in pre-market trade following the release of these results.
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We’re enormously grateful that in these uniquely challenging times we’ve been able to provide our members around the world with a source of escape, connection and joy while continuing to build our business. With 8.5m paid net additions in Q4, we crossed the 200m paid memberships mark."
About Netflix (NFLX)
Netflix is the world's leading internet entertainment service with over 200 million paid memberships in over 190 countries enjoying TV series, documentaries and feature films across a wide variety of genres and languages. Members can watch as much as they want, anytime, anywhere, on any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments.
Ten years ago a company like Netflix would have been given a very slim chance of survival. Today its one of the largest companies in the world based on its market capital, and its also part of famed FAANG stocks. FAANG is a acronym for Facebook, Apple, Amazon, Netflix and Google.
Ten years ago a company like Netflix would have been given a very slim chance of survival. Today its one of the largest companies in the world based on its market capital, and its also part of famed FAANG stocks. FAANG is a acronym for Facebook, Apple, Amazon, Netflix and Google.
Overview of Netflix's 4th quarter 2020 earnings report
The data refers to the latest quarter unless specified otherwise:
Regional information for Netflix
The summary below shows the revenue earned for Netflix from various regions for the 4th quarter of their 2020 fiscal year (in $ billions)
- Revenue: $6.64 billion (up from $5.47billion from the same quarter of the previous year)
- Revenue increased by 21.3% over the last 12 months
- Cost of revenue: $4.16 billion (up from $3.47 billion for the same quarter of the previous year)
- Cost of revenue increased by 20.2% over the last 12 months
- Net income $542.1 million (down from $586.9 million for the same quarter of the previous year)
- Diluted earnings per share: $1.19 (down from $1.30 for the same quarter of the previous year)
- PE ratio of Netflix: 82.5
- Diluted weighted-average shares outstanding: 455.3 million (up from 451.4 million for the same quarter of the previous year)
- Cash and cash equivalents: $8.205 billion
- Cash and cash equivalents per share: $18.02
- Cash and cash equivalents makes up 3.6% of Netflix's market capital
- Cash and cash equivalents makes up 20.8% of Netflix's total assets
- Stockholders equity of Netflix: $11.065 billion
- Stockholders equity per share: $24.30
- Netflix is trading at 20.7 times its stockholders equity which is well outside the expected range of between 2 and 6 which most companies tend to trade at.
- For reference the S&P500 is trading at a price to book of 4.1
Regional information for Netflix
The summary below shows the revenue earned for Netflix from various regions for the 4th quarter of their 2020 fiscal year (in $ billions)
- United States and Canada: 2.979
- Europe, Middle East and Africa: 2.137
- Latin America: 0.788
- Asia- Pacific: 0.684
Netflix' management commentary on their 3rd quarter 2020 earnings
2020 was an incredibly difficult year with extraordinary loss for so many families, new restrictions that none of us have ever had to live with before and great uncertainty. We’re enormously grateful that in these uniquely challenging times we’ve been able to provide our members around the world with a source of escape, connection and joy while continuing to build our business. With 8.5m paid net additions in Q4, we crossed the 200m paid memberships mark. For the full year, we added a record 37m paid memberships, achieved $25 billion in annual revenue (+24% year over year) and grew operating profit 76% to $4.6 billion
Q4 Results and Q1 Forecast
Average paid streaming memberships increased 23% year over year in Q4, while average revenue per membership was flat year over year both on a reported and foreign exchange (F/X) neutral basis. 1 Revenue was 1% higher than our guidance forecast, as paid net adds exceeded our 6.0m projection by 2.5m. Operating margin of 14.4% (a 600bps increase from Q4’19) also came in above our guidance, due to higher-than-expected revenue. EPS of $1.19 vs. $1.30 a year ago included a $258m non-cash unrealized loss from F/X remeasurement on our Euro denominated debt. For the full year, our 37m paid net additions represented a 31% increase from 2019’s 28m paid net adds. We’re becoming an increasingly global service with 83% of our paid net adds in 2020 coming from outside the UCAN region. Our EMEA region accounted for 41% of our full year paid net adds, while APAC was the second largest contributor to paid net additions with 9.3m (up 65% year over year).
Average paid streaming memberships increased 23% year over year in Q4, while average revenue per membership was flat year over year both on a reported and foreign exchange (F/X) neutral basis. 1 Revenue was 1% higher than our guidance forecast, as paid net adds exceeded our 6.0m projection by 2.5m. Operating margin of 14.4% (a 600bps increase from Q4’19) also came in above our guidance, due to higher-than-expected revenue. EPS of $1.19 vs. $1.30 a year ago included a $258m non-cash unrealized loss from F/X remeasurement on our Euro denominated debt. For the full year, our 37m paid net additions represented a 31% increase from 2019’s 28m paid net adds. We’re becoming an increasingly global service with 83% of our paid net adds in 2020 coming from outside the UCAN region. Our EMEA region accounted for 41% of our full year paid net adds, while APAC was the second largest contributor to paid net additions with 9.3m (up 65% year over year).
As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report and we strive for accuracy. For Q1’21, we expect paid net adds of 6.0m vs. last Q1’s 15.8m, which included the impact from the initial COVID-19 lockdowns. Since the start of 2018, our paid memberships have risen from 111m to 204m and our average revenue per membership has grown from $9.88 to $11.02, despite significant F/X headwinds. This approach has allowed us to organically increase revenue by $4-$5 billion annually over the past several years. We’ve made good progress growing our profitability with FY20 operating margin of 18% rising five percentage points over prior year. For FY21, we’re now targeting a 20% operating margin, up two percentage points from 2020 and higher than our previous 19% forecast, due to a more favorable revenue outlook. As we said last quarter, we intend to continue to grow our operating margin each year at an average rate of three percentage points per year over any few-year period, but we anticipate some lumpiness. Some years we’ll be a little over (like in 2020), some years a little under (like in 2021), but we are trying to keep on an average three percentage points per year long-term trajectory
Content
The big growth in streaming entertainment has led legacy competitors like Disney, WarnerMedia and Discovery to compete with us in new ways, which we’ve been expecting for many years. This is, in part, why we have been moving so quickly to grow and further strengthen our original content library across a wide range of genres and nations. Our fourth quarter slate highlights the breadth and diversity of our entertainment offering.
In scripted English language television, season four of the critically acclaimed The Crown was the biggest season so far and drove new watchers of prior seasons. In its first 28 days, more member households chose to watch season four of The Crown than each of the prior seasons, helping to grow the number of member households that have chosen to watch this series to over 100m since its initial launch. In late December, we released our first original series from Shonda Rhimes, Bridgerton. This title has proven immensely popular and we’ll have some exciting news about Bridgerton later this week. Our largest original film of the quarter was The Midnight Sky, starring and directed by George Clooney; we estimate 72m member households will choose to watch this title in its first four weeks. In its first 28 days, 43m member households chose to watch our animated feature film Over the Moon (directed by legendary creator Glen Keane) with high levels of rewatching.
We Can Be Heroes (directed by Robert Rodriguez) was another successful family film with a projected 53m member households choosing this title in its first four weeks. Our holiday movie slate also resonated with our members; in the first four weeks, 68m and 61m member households chose to watch Holidate (starring Emma Roberts) and The Christmas Chronicles: Part Two (starring Kurt Russell), respectively. Our first Portuguese language holiday film from Brazil, Just Another Christmas (starring Leandro Hassum), was also a big hit with 26m member households globally choosing to watch in the first 28 days of release. We continue to ramp up our local original content slate. Our top local titles this quarter include Barbarians (a historical action series from Germany that 37m member households globally chose to watch in the first four weeks), Sweet Home, our Korean language horror show (22m member households), Selena: The Series, which particularly resonated with members throughout Mexico and the US (25m member households globally), and Alice in Borderland, a sci-fi thriller from Japan (18m member households). While designed to be very impactful in the home country, we see many cases of our local originals traveling more broadly. For example, Lupin, an adrenalin-filled French language heist series released in early January, has hit #2 in our US Top 10 list and ranked #1 in dozens of other countries including Brazil, Argentina, Germany, Italy, Spain, Poland, Vietnam, the Philippines and many more.
We project 70m member households will choose to watch Lupin in its first 28 days of release. In addition to titles with big viewership, we also aspire to have hits that become part of the cultural zeitgeist. In 2020 alone, we had Tiger King, Bridgerton and The Queen’s Gambit. Not only did 62m member households choose to watch The Queen’s Gambit in its first 28 days (making this show our biggest limited series in Netflix history), but it ignited sales of chess sets and inspired the next generation of chess prodigies. In fact, Netflix series accounted for nine out of the 10 most searched shows globally in 2020, while our films represented two of the top 10.
Product
Last year, we continued to improve our parental controls so that families have more control over their experience. These enhancements include allowing members to filter out content at the title level or by maturity rating, creating a profile lock PIN and customizing autoplay settings for any profile. We also extended parental control support to downloads to give parents peace of mind regardless of how Netflix is used. And we provided parents with more transparency into the themes, characters and content that their kids love with the Kids Activity Report, a weekly message designed to keep parents informed about the content their children are watching. As we bring our members more great programming, we’re always listening and working to make it easier for them to find the right show and film to watch. That’s why last year we debuted our Top 10 lists around the world, and in October we introduced the New & Popular tab in our television user interface, which includes a new Worth the Wait section, highlighting titles as far as a year away that you can remind yourself about. As another exciting step in this effort, we’ve been testing a new feature that gives members the ability to choose to instantly watch a title chosen just for them versus browse. The response has been positive and we plan to roll it out globally in the first half of 2021.
Competition
It’s a great time to be a consumer of entertainment. There are a wealth of options ranging from linear TV to video gaming to user generated content on YouTube and TikTok. We continue to work hard to grow our small share of screen time against these major competitors. Discovery recently launched its streaming service. Disney+ is expanding in new countries and with more content. ViacomCBS will be unveiling its plans for Paramount+ in 2021. Combined with the launch of AppleTV+, WarnerMedia’s HBO Max, and NBCUniversal’s Peacock streaming services, this signifies that these companies all recognize the future is streaming entertainment, a vision we have been working towards since inception. Our strategy is simple: if we can continue to improve Netflix every day to better delight our members, we can be their first choice for streaming entertainment. This past year is a testament to this approach. Disney+ had a massive first year (87 million paid subscribers!) and we recorded the biggest year of paid membership growth in our history.
Cash Flow and Capital Structure
Net cash generated by operating activities in Q4 was -$138 million vs. -$1.5 billion in the prior year period. Free cash flow (FCF) for the quarter was -$284 million vs. -$1.7 billion in Q4‘19, bringing full year 2 2020 free cash flow to +$1.9 billion vs. -$3.3 billion in 2019.
We believe we are very close to being sustainably FCF positive. For the full year 2021, we currently anticipate free cash flow will be around break even (vs. our prior expectation for -$1 billion to break even). Combined with our $8.2 billion cash balance and our $750m undrawn credit facility, we believe we no longer have a need to raise external financing for our day-to-day operations. Our 5.375% February 1, 2021 bonds mature in Q1. We plan on repaying the bond at maturity out of cash on hand, as we are currently well above our minimum cash needs. As we generate excess cash, we intend to maintain $10B-15B in gross debt and will explore returning cash to shareholders through ongoing stock buybacks, as we did in the past (2007-2011)
Content
The big growth in streaming entertainment has led legacy competitors like Disney, WarnerMedia and Discovery to compete with us in new ways, which we’ve been expecting for many years. This is, in part, why we have been moving so quickly to grow and further strengthen our original content library across a wide range of genres and nations. Our fourth quarter slate highlights the breadth and diversity of our entertainment offering.
In scripted English language television, season four of the critically acclaimed The Crown was the biggest season so far and drove new watchers of prior seasons. In its first 28 days, more member households chose to watch season four of The Crown than each of the prior seasons, helping to grow the number of member households that have chosen to watch this series to over 100m since its initial launch. In late December, we released our first original series from Shonda Rhimes, Bridgerton. This title has proven immensely popular and we’ll have some exciting news about Bridgerton later this week. Our largest original film of the quarter was The Midnight Sky, starring and directed by George Clooney; we estimate 72m member households will choose to watch this title in its first four weeks. In its first 28 days, 43m member households chose to watch our animated feature film Over the Moon (directed by legendary creator Glen Keane) with high levels of rewatching.
We Can Be Heroes (directed by Robert Rodriguez) was another successful family film with a projected 53m member households choosing this title in its first four weeks. Our holiday movie slate also resonated with our members; in the first four weeks, 68m and 61m member households chose to watch Holidate (starring Emma Roberts) and The Christmas Chronicles: Part Two (starring Kurt Russell), respectively. Our first Portuguese language holiday film from Brazil, Just Another Christmas (starring Leandro Hassum), was also a big hit with 26m member households globally choosing to watch in the first 28 days of release. We continue to ramp up our local original content slate. Our top local titles this quarter include Barbarians (a historical action series from Germany that 37m member households globally chose to watch in the first four weeks), Sweet Home, our Korean language horror show (22m member households), Selena: The Series, which particularly resonated with members throughout Mexico and the US (25m member households globally), and Alice in Borderland, a sci-fi thriller from Japan (18m member households). While designed to be very impactful in the home country, we see many cases of our local originals traveling more broadly. For example, Lupin, an adrenalin-filled French language heist series released in early January, has hit #2 in our US Top 10 list and ranked #1 in dozens of other countries including Brazil, Argentina, Germany, Italy, Spain, Poland, Vietnam, the Philippines and many more.
We project 70m member households will choose to watch Lupin in its first 28 days of release. In addition to titles with big viewership, we also aspire to have hits that become part of the cultural zeitgeist. In 2020 alone, we had Tiger King, Bridgerton and The Queen’s Gambit. Not only did 62m member households choose to watch The Queen’s Gambit in its first 28 days (making this show our biggest limited series in Netflix history), but it ignited sales of chess sets and inspired the next generation of chess prodigies. In fact, Netflix series accounted for nine out of the 10 most searched shows globally in 2020, while our films represented two of the top 10.
Product
Last year, we continued to improve our parental controls so that families have more control over their experience. These enhancements include allowing members to filter out content at the title level or by maturity rating, creating a profile lock PIN and customizing autoplay settings for any profile. We also extended parental control support to downloads to give parents peace of mind regardless of how Netflix is used. And we provided parents with more transparency into the themes, characters and content that their kids love with the Kids Activity Report, a weekly message designed to keep parents informed about the content their children are watching. As we bring our members more great programming, we’re always listening and working to make it easier for them to find the right show and film to watch. That’s why last year we debuted our Top 10 lists around the world, and in October we introduced the New & Popular tab in our television user interface, which includes a new Worth the Wait section, highlighting titles as far as a year away that you can remind yourself about. As another exciting step in this effort, we’ve been testing a new feature that gives members the ability to choose to instantly watch a title chosen just for them versus browse. The response has been positive and we plan to roll it out globally in the first half of 2021.
Competition
It’s a great time to be a consumer of entertainment. There are a wealth of options ranging from linear TV to video gaming to user generated content on YouTube and TikTok. We continue to work hard to grow our small share of screen time against these major competitors. Discovery recently launched its streaming service. Disney+ is expanding in new countries and with more content. ViacomCBS will be unveiling its plans for Paramount+ in 2021. Combined with the launch of AppleTV+, WarnerMedia’s HBO Max, and NBCUniversal’s Peacock streaming services, this signifies that these companies all recognize the future is streaming entertainment, a vision we have been working towards since inception. Our strategy is simple: if we can continue to improve Netflix every day to better delight our members, we can be their first choice for streaming entertainment. This past year is a testament to this approach. Disney+ had a massive first year (87 million paid subscribers!) and we recorded the biggest year of paid membership growth in our history.
Cash Flow and Capital Structure
Net cash generated by operating activities in Q4 was -$138 million vs. -$1.5 billion in the prior year period. Free cash flow (FCF) for the quarter was -$284 million vs. -$1.7 billion in Q4‘19, bringing full year 2 2020 free cash flow to +$1.9 billion vs. -$3.3 billion in 2019.
We believe we are very close to being sustainably FCF positive. For the full year 2021, we currently anticipate free cash flow will be around break even (vs. our prior expectation for -$1 billion to break even). Combined with our $8.2 billion cash balance and our $750m undrawn credit facility, we believe we no longer have a need to raise external financing for our day-to-day operations. Our 5.375% February 1, 2021 bonds mature in Q1. We plan on repaying the bond at maturity out of cash on hand, as we are currently well above our minimum cash needs. As we generate excess cash, we intend to maintain $10B-15B in gross debt and will explore returning cash to shareholders through ongoing stock buybacks, as we did in the past (2007-2011)
Netflix (NFLX) stock price chart over the last 5 years
The image below shows the stock price history of Netflix (NFLX) over the last 5 years. And its been a very good time for Netflix (NFLX) stockholders with the stock increasing by an impressive 463.50% over the last 5 years. Not the type of returns investors would say no to.
The stock of Netflix is trading at closer to its 52 week high than it is to its 52 week low which is a clear indication that the short term sentiment and momentum of Netflix stock is very positive at this point in time.
The stock of Netflix is trading at closer to its 52 week high than it is to its 52 week low which is a clear indication that the short term sentiment and momentum of Netflix stock is very positive at this point in time.
Netflix (NFLX) stock vs Walt Disney (DIS) stock over the last 5 years
The image below shows the stock price performance of Netflix (NFLX) and Walt Disney (DIS) over the last 5 years. While both these firms are active in the consumer entertainment industry and both are active in the video streaming service industry, the stock price performance and trends of these two firms are very different. Over the 5 year period Netflix returned 463.5% while the stock of Disney returned 85.30% over the same period of time. Netflix being the clear winner when it comes to stock performance of the streaming services groups over the last 5 years.
Netflix (NASDAQ: NFLX) latest stock valuation
So based on the earnings report of Netflix (NASDAQ: NFLX) what do we value Netflix (NFLX) stock at? Based on the earnings report and the increased competition our valuation models sets a target (full value) price on Netflix of $411.70. (up slightly from our 3rd quarter 2020 Netflix earnings report valuation). Based on our target price (full value price) we believe the stock of Netflix is overvalued.
We usually recommend that long term fundamental or value investors look to enter a stock at least 10% below our target price (full value price) which in this case is $411.70 We therefore believe a good entry point into Netflix is $370.50 or below. Since the stock of Netflix is well above our recommended entry point we would not recommend buying into Netflix right now as we believe there is still a lot of hope and fairytales and butterflies built into their future earnings expectations with the group trading at a PE ratio of over 80
We therefore rate the stock of Netflix (NFLX) as a SELL
We usually recommend that long term fundamental or value investors look to enter a stock at least 10% below our target price (full value price) which in this case is $411.70 We therefore believe a good entry point into Netflix is $370.50 or below. Since the stock of Netflix is well above our recommended entry point we would not recommend buying into Netflix right now as we believe there is still a lot of hope and fairytales and butterflies built into their future earnings expectations with the group trading at a PE ratio of over 80
We therefore rate the stock of Netflix (NFLX) as a SELL
Next earnings release for Netflix
It is expected that Netflix will release its 1st quarter earnings report for their 2021 fiscal year towards the end of April 2021.