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Netflix – Unrivalled Global Content Distribution Platform


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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.

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