Netflix valuation is a goal stretched too far
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Saba
NEW YORK, Oct 18 (Reuters Breakingviews) -Netflix’s NFLX.O lofty valuation is headed for a reality check. The $300 billion streaming video giant reported on Thursday quarterly revenue rose 15% year-over-year and subscriber additions were better than expected. Yet ad dollars are trickling in and a crackdown on passwords will run out of stream. These trends make Netflix’s worth seem too good to believe.
The company co-led by Ted Sarandos and Greg Peters is already miles ahead of its competition including Walt Disney DIS.N and Warner Bros Discovery WBD.O, which have streaming services that are struggling to do more than just break even. The company is forecasting $39 billion in revenue this year. And on most metrics, Netflix looks very strong. Operating margins rose to 30% from 22% during the same quarter last year. The company added 5 million additional customers, more than analysts were anticipating according to LSEG.
The progress is reflected in the company’s current stock price, which is flirting with an all-time high hit earlier this month. Over the past 20 years, Netflix has delivered better returns to shareholders – 36% annualized – than the S&P 500 Index .SPX, Alphabet GOOGL.O and even Apple AAPL.O.
Yet it's nearly impossible for Netflix to best that pace in the future. Netflix’s share price would be around $1,770 a piece in three years if that compound rate continued, giving it an enterprise value close to $760 billion. Based on an EBIT multiple of 31 times, according to LSEG, Netflix would have to generate $25 billion of profit in three years. Its current margin suggests Netflix would have to double revenue to justify that.
Meanwhile, Netflix said on Thursday that advertising sales won’t be meaningful because it needs to improve its offering and that it will “take time to build a new revenue stream.” Rival YouTube is ahead of Netflix when it comes to attracting marketing dollars and it has a higher share of streaming viewership, according to Nielsen. The company is a pioneer, but not a miracle worker.
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CONTEXT NEWS
Netflix reported on Oct. 17 that revenue for the third quarter rose 15% year-over-year to $9.8 billion. The company said it added 5 million new subscribers, about 1 million more than analysts forecast according to LSEG. The company has 283 million subscribers.
Netflix shares closed at an all-time high on Oct. 10, at $730.29.
Netflix returned more to shareholders in 20 years https://reut.rs/4dM8aVL
Editing by Lauren Silva Laughlin and Pranav Kiran
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