5 Factors to Consider Before Buying Netflix Stocks – MavenFlix
Netflix (NFLX) – Get Netflix Inc. report equities have been in poor shape this year, especially after reporting quarterly results well below market expectations and indicating a decline in business.
As a result, the share price is already down almost 70% in 2022 alone. However, Netflix’s business remains robust from a basic standpoint. Here are five factors to consider before becoming a Netflix investor.
(Read more from MavenFlix: Netflix vs. Spotify: Which is the best streaming stock?)
1. Netflix’s profitability
The more profit a company generates through its shareholders, who set up as little capital as possible, the more the company will benefit.
When we look at Netflix’s return on equity (ROE) – how much shareholders have invested in the company to finance the business – we see that the streaming company currently has a return of 28.54%, with an average of 23.96% over the course of history as a listed one. company.
Although Netflix’s ROE has fallen from 32.28% in 2021, the numbers are still exciting. In general, companies with an ROE above 10% often have a competitive advantage.
Netflix’s growth potential
Last quarter, Netflix’s growth prospects were put in check. There is great skepticism among experts as to whether Netflix has reached the top in the streaming industry.
So let’s consider these factors:
- Growth Industry’s Growth Potential: Grand View Research has indicated that the industry will reach around $ 330 billion by 2030, reflecting a compound average growth rate (CAGR) of 21.3%.
- Economic growth: About 65% of Netflix subscribers are outside North America, which means that the company is highly dependent on participation from Europe and emerging markets in South America.
3. Netflix’s business risks
This point complements the above, in that risk can limit the company’s growth potential. When you look at Netflix’s 10K form, the main risk is described as:
- If Netflix’s efforts to attract and retain members do not succeed, it will adversely affect the company’s business.
- The competitive landscape in entertainment video and streaming, as well as piracy, can have a negative impact on Netflix’s business.
- The high long-term costs of content production can limit the company’s ability to flex its operations.
The latest results showed that these risks have partially materialized or are likely to materialize soon. Netflix’s failure to report subscriber growth, thanks to strong competition in the industry, led to shares plunging nearly 40% right after the first quarter earnings report.
4. Netflix’s valuation
Although a company’s fundamentals are excellent, buying shares at the wrong price can be a big mistake. However, the task of pricing Netflix properly is not easy. This is because, right now, the recent low number of subscribers has questioned whether Netflix can still be priced as a growth stock.
If we look at Netflix’s price-to-revenue ratio (P / E), the company trades at a multiple of 16 times. This means a difference of 18% above the industry average. Looking at the book-to-book (P / B) value, Netflix trades at a multiple of 4.15 times, which is 109% above the industry average. This indicates that the stock cannot be considered undervalued.
5. Netflix management
Last but not least is the company’s management. Netflix has an open-minded culture where the core philosophy is people over processes. Netflix’s co-CEO, Reed Hastings, was also a co – founder of the company in 1997.
Studies show that S&P 500 companies whose founders remain CEOs are more innovative, generate higher brand values and are more likely to make bold investments to reinvent and adapt business models.
(Disclaimer: This is not an investment advice. The author may be long one or more stocks mentioned in this report. The article may also contain affiliate links. These partnerships do not affect editorial content. Thanks for the support MavenFlix)