A closer look at Netflix; Greetings from Wimbledon
In his 1989 annual letter to Berkshire Hathaway (BRK-B) shareholders, Warren Buffett wrote, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price... [W]hen buying companies or common stocks, we look for first-class businesses accompanied by first-class managements."
I'm keeping this bit of wisdom in mind as I dive deeper into the 22 companies (and their beaten-down stocks) that I took a "quick glance" at two weeks ago.
Last Wednesday and Thursday, I analyzed one such high-quality business – medical-device maker Boston Scientific (BSX).
Today, I'll do the same for streaming giant Netflix (NFLX) by taking a closer look at its historical financials and valuation...
In my June 23 e-mail, I wrote that Netflix is "another fantastic company whose stock has pulled back quite a bit." From its all-time high of $133.91 last year, it's down 42%:
Netflix has been one of the greatest growth stories of all time. Revenue and net income have risen 47 times and 274 times, respectively, in the past two decades. And there are no signs of a slowdown, as you can see in this chart:
The company had five years of negative free cash flow ("FCF") to fund international expansion and the growth of its content library – both highly successful ventures. Since then, FCF has exploded:
Whenever I see a stock that has fallen a lot, I want to see if there's any sign of weakening financials in recent quarters. But that's certainly not the case with Netflix, as it reported its highest FCF ever in the first quarter:
Netflix has used its FCF to pay down debt and buy back shares. As you can see in this chart, net debt is down to $4.5 billion – a small fraction of the $11.9 billion of FCF the company generated in the past year:
It has also ramped up share repurchases since it started generating substantial FCF:
As a result, the company's diluted shares outstanding have started to decline, albeit only by 1.6% in the past year:
In summary, this is an A+ financial picture: Netflix continues to grow rapidly, FCF is soaring, and its balance sheet is strong.
Turning to valuation, here's what I wrote in my June 23 e-mail:
[Its] valuation got ahead of itself. A year ago, it was trading at more than 50 times forward earnings. Today, with the stock down and earnings up, it trades at only 20.3 times this year's estimates – a below-market multiple for a far-above-market-quality business.
The stock is up a bit since then, closing at $77.65 on Thursday. And consensus analysts' earnings estimates for this year are $3.59 per share. That means the stock is currently trading at 21.6 times this year's estimates – slightly below the average for the S&P 500 Index.
In addition, it's trading far below its average forward price-to-earnings (P/E) multiple of 65.1 times over the past decade, as you can see in this chart:
I think Netflix's stock is extremely interesting at these levels. The company reports second-quarter earnings in 10 days, which my team and I will be reviewing carefully.
If we decide it's a buy, Stansberry's Investment Advisory subscribers will, as always, be the first to know. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. Greetings from London! I went to Wimbledon over the weekend and this morning, joined by my parents (who flew in on Saturday from their home in Nairobi, Kenya) and two friends from New York, David Berman and Glenn Tongue.
We saw many of the top players, including the 12th-seeded woman, Marta Kostyuk, who has a youth tennis foundation in Ukraine that I support. She's having her best year, having won the Rouen and Madrid opens, made the semifinals at the French Open for the first time, and made the quarterfinals at Wimbledon today.
Here are some pictures:
After watching Kostyuk's win this morning, I flew to Italy, where I'll be cohosting the 22nd annual Value Investing Seminar on Thursday and Friday in the beautiful city of Trani. If you'd like to join us, you can learn more and register to attend right here.