Netflix – Unrivalled Global Content Distribution Platform
(NFLX)
Growth prospects remain bright. APAC and EMEA markets remain lowly penetrated for Netflix and present a large opportunity for NFLX’s growth, given a combined market size which is a multiple of the mature US/Canada market. NFLX’s share of TV time in its most penetrated market in the US remains less than 10%. We believe the slowdown in growth during the latest quarter is due to normalization from the gradual re-opening of economies. A strong slate of content and subscriber growth in developing markets are set to re-accelerate NFLX’s growth in the coming quarters.
Expanding TAM with entry into gaming. Netflix is expanding its potential customer base with the introduction of gaming. It acquired three game studios thus far: Night School Studio in Sep 21, Next Games, and Boss Fight Entertainment this month.
Margin expansion leads to improved cash flow. As Netflix scales up, margins have expanded. GAAP operating margin has grown from 7% in 2018 to 21% in 2021. It aims to steadily increase operating margin over time as we balance growth and profitability – targeting an average annual increase of 3 ppt per year over any few-year period, i.e. 25% margin in 2023. NFLX has pushed through higher pricing in its mature markets and is expected to post its first year of positive free cash flow this year.
Valuation. Netflix currently trades at 33x 2022F PE. Our recommended entry price is $325 (~85% of current levels) based on a 1.2x PEG, given 24% 3-year EPS CAGR from 2022F-2025F. Our entry price implies an upside of over 50% to the consensus target price.