Blue-chip American entertainment company, Netflix Inc. (NYSE: NFLX) is close to touching its 52-week high price level and has witnessed a walloping rally of 115.45% in last one year (as at May 25, 2018). The group’s return on equity is on a higher side (about 20%) with a decent profit margin. While some bearish sentiments have started weighing the stock on the downside, the group still has some momentum that can help touch levels above $400. The stock was priced at $351.29 as at closing hours of May 25, 2018 and has a P/E multiple of about 210, however there is no dividend yield for the stock currently. The rise of about 70% since January has helped it attain a market capitalization of nearly $152.7bn while return on equity has improved to 20.4% in 2017 from 7.6% in 2016 and is well above the industry median of 5.4%.
Let us understand where this recent fizz is coming from –
The Internet television network provider, which operates mainly through Domestic streaming, International streaming and Domestic DVD, allows consumers to watch original series, documentaries, feature films, as well as television shows and movies directly on their Internet-connected screen, televisions, computers and mobile devices. In order to expand further, the group has grabbed a multimillion-dollar deal with Barack and Michelle Obama to use their newly created TV production house, Higher Ground Productions, to create shows. Thus, with this news, the recent lift in stock prices revealed the confidence bestowed by investors on the stock and the future of the world’s largest paid online video service. In fact, the group was said to have exceeded the value of Disney. Netflix is also setting itself to co-finance and distribute Michael Bay’s next film, “Six Underground”, featuring Ryan Reynolds and this brings Netflix snapping up the deal against Michael Bay’s long standing relationship with Paramount Studios. In a way, Netflix is able to get hold of good talent pool and enhance its reputation with more value content being provided.
However, the group’s cash flow burn rate has been on the rise as the company is catching up on its international expansion while many questions have been raised on gross profit margins and operating margins. Netflix 2017 operating margin of 7.2% is above industry median but the same level also prevailed in 2014. Further, the gross profitability margin of 34.5% has been below 48.5% of industry median. On the other hand, the trailing 5-year EPS growth is above 100% well above its peers.
Five year EPS Growth (Source: Thomson Reuters)
Coming back to the recent deal with the Obamas, Netflix is thus aiming to adopting well with the vision of the former president who said, “We hope to cultivate and curate the talented, inspiring, creative voices who are able to promote greater empathy and understanding between peoples, and help them share their stories with the entire world”. Under the new move, scripted and unscripted series, documentaries and feature films will be covered.
However, these shades of positivity are also accompanied by sneering relation between Netflix and Disney with Disney licensing some content to Netflix and the agreement between the two setting to expire as Disney pushes deeper into subscription-streaming territory. Then there are concerns over the high level of content production that many other players including Apple, Google and Amazon, are eyeing given the competitive space that entails creative talent. This has started pinching in terms of costs.
Nonetheless, it is worth noting that Netflix subscribers totaled 125 million as of March 31 and the stock is set to come up with its earnings report with market expectations of the significant upwards movement. As of now, the stock looks touch expensive at the current price while we have a watch on the same.
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