As a business, Netflix's (NFLX) story looks as impressive as ever. Between the scale and data advantages the streaming giant has built up and the quality of its decision-making to date, there's every reason to think it will rack up tens of millions of additional subscribers and successfully carry out new price hikes in the years to come.
However, even the most attractive business can be overpriced if investors get carried away. And some quick math suggests that if Netflix's stock isn't overvalued at current levels, it's at least a less attractive deal than the shares of some other tech giants that have a lot going for them.
Following its latest rally, Netflix has an enterprise value (EV - market cap plus net debt) of $156.7 billion. As quite a few observers have pointed out, Reed Hastings's company now has a market cap on par with that of Disney (DIS) , which still has more than four times as much trailing revenue.
Netflix's shares now trade for 76 times a 2019 GAAP EPS consensus of $4.64, and (though such a far-off estimate needs to be taken with a grain of salt) 21 times a 2023 EPS consensus of $16.87. However, even these numbers don't tell the whole story, since Netflix (though GAAP profitable) continues to burn cash, in large part due to its massive content investments.
The company had free cash flow (FCF) of negative $2 billion in 2017, and has guided for 2018 FCF of negative $3 billion to negative $4 billion (the consensus analyst estimate, to be fair, is near the low end of that range). The main culprit behind the 2018 outlook: A content budget that's set at $7.5 billion to $8 billion on a profit-and-loss basis, and (given Netflix's past cash-flow statements) which could involve cash outlays above $11 billion.
Aggressive ad spending is also contributing to cash burn: Netflix has guided for its marketing spend to rise 56% this year to $2 billion. In addition, the company expects R&D spend to rise 23% this year to a healthy $1.3 billion.
Assuming Netflix slows its spending growth in the coming years, and that it still has plenty of room to grow both its subscriber count and (with the help of price hikes) its monthly average selling price (ASP), the company will one day produce substantial amounts of FCF. But will it be enough to justify a $150 billion-plus 2018 valuation?
Netflix ended Q1 with 125 million streaming subs (118.9 million paid), and had an ASP of around $10 per paid sub. Notably, whereas the company's U.S. ASP was around $11, its international ASP was a little over $9. With the lion's share of Netflix's sub growth now coming from international markets, a sales mix shift towards those markets will likely pressure ASP even as price hikes and a growing mix of costlier subscription plans (i.e., HD and 4K plans) provide a boost.
On average, analysts currently expect Netflix to have 145 million streaming subs by the end of 2018, and to get to 245 million by the end of 2022. Let's assume the 2022 estimate (like many prior subscriber estimates) is conservative and that Netflix gets to 270 million subs. Let's also assume that ASP has risen by about 30% to $13. That would put Netflix on a $42 billion annual revenue run rate by the end of 2022.
Now suppose Netflix's cash content spending growth (nearly 30% last year) moderates, rising at a 15% compound annual rate between 2018 and 2022. That might leave content spend around $20 billion. And suppose Netflix's various other cash expenses, which were near $5 billion last year and could be around $6.5 billion this year, also see their annual growth slow to around 15%. That would leave them around $11 billion in 2022.
Add in a couple billion in tax expenses, and you're left with around $9 billion in FCF in the 2022 timeframe with the help of some relatively optimistic estimates. Netflix's EV is currently equal to 17 times that estimate for the company's cash flow potential four-plus years from now.
By contrast, one can invest in Facebook (FB) today for 20 times a 2019 GAAP EPS estimate that (given the company's long history of earnings beats) could easily prove conservative and would undoubtedly be higher if the company's aggressive data center and content security spending. Or one could invest in Apple (AAPL) (admittedly a slower-growing company, but also a very dependable one) for 14 times its fiscal 2019 (ends in Sep. 2019) GAAP EPS consensus.
There are also some large-cap chip stocks with meaningful long-term growth drivers trading at attractive multiples. Unless Netflix really blows away current expectations for its future growth and profitability, there are arguably a lot of better tech bargains out there right now.