A little over a year ago, I was ruminating about
) and using it as a tutorial for valuation. (See:
Dixon's Take: A Holiday Lesson About Netflix and
.) At the time, the stock was trading in the mid $70s on its way to
$129 before retracing back to the mid $50s, and I had calculated
that a reasonable target of over $100 was achievable. Here we are
15 months later with the stock trading at $216, which forces the
question: Is today's price justifiable? In a word, yes. Here's the
Currently Netflix has approximately 30 million US subscribers plus
an additional 7 million subscribers outside of North America, which
puts the company on track to achieve 45 million by year-end.
Assuming an average monthly $10 ARPU (let's keep the number simple)
results in $450 million of projected revenue per month, or
annualized revenue of $5.4 billion by year-end, applying a
traditional 25% EBITDA margin (a normalized cable television
network margin) suggests normalized EBITDA of $1.350 billion or
projected pro forma forward EBITDA of $22.50 per share.
Currently the company has an equity capitalization of $13 billion
and net cash of $514 million, resulting in a total enterprise value
of $12.5 billion (the equity value less the cash), which, when
divided by estimated future EBITDA of $1.35 billion, suggests a
rather ordinary 9.25 TEV/EBITDA trading multiple.
Is the Netflix Stock Boom a House of Cards?
As most media companies trade in a range between 8 to 12 times,
this is not an outlier; given the company's competitive positioning
and focus, there is every reason to believe it could trade up to
the higher end of the multiple range. A little math (12x 22.50 +
514/60) puts that target above $270.
Can the company achieve $1.35 billion in EBITDA?
Adding back the approximately $500 million of content amortization
reported in the first quarter to the $31 million in operating
income and annualizing that number actually puts the company on
track to generate an annualized run rate EBITDA of over $2 billion
-- so yes, Netflix has some room to run.
But what about investment in content and the deleterious impact on
earnings? For the period, investment in content exceeded
amortization by approximately $88 million, and it is likely that
the company will continue to expand its production as its primary
use of cash. But over time as the self-produced library continues
to grow and the life of individual projects lengthens, margins
expand, providing confidence in the company's ability to achieve
the targeted 25% pro forma margin articulated earlier.
A scene from
House of Cards
, a Netflix Original Production.