After a tumultuous period in which the title has lost much of its value, Netflix Inc. (NFLX, Financial) is finally gaining momentum. The company is moving towards a more diversified business model and its shares appear grossly undervalued.
Additionally, Netflix recently received accolades from Wall Street investment banks, which has been rare since the start of the year.
Based on these developments, it could be a suitable investment for those looking for intrinsic value for long-term gains.
Updated by Evercore
Earlier this week, Evercore ISI updated the stock to outperform on the premise that its revenue growth potential is not built into Wall Street expectations. The financial services firm says Netflix’s advertising revenue could galvanize its growth and add a lot of residual value to the balance sheet.
Advertising revenue pipeline
After experiencing a decline in subscription growth for the first time since its inception, Netflix has decided to introduce ad revenue into its business model, which it believes could reach 40 million recurring viewers by the third quarter of next year.
Whether or not Netflix achieves its goal is debatable. However, exposure to an industry with a compound annual growth rate of around 14.3% is certainly a nimble move by the company’s C-suite.
Source: Mordor Intelligence
Key growth reports
Netflix produces a staggering 31.2% return on equity, which implies that it is a centuries-old growth asset. In addition, the stock’s return on capital employed of 18.18% provides after-tax operating profits relative to net working capital.
Overall, Netflix remains on a solid growth trajectory despite numerous concerns about stagnant subscriber growth.
Absolute and relative evaluation metrics
An analysis of discounted free cash flow based on earnings shows that Netflix’s stock is significantly undervalued as its fair value exceeds the $ 387 threshold. Of course, sensitivity analysis needs to be done as the current economic climate is unstable; however, even with a 20% safety margin, the stock would still be undervalued.
Relative valuation metrics validate the stock’s absolute valuation. For example, Netflix’s price-to-sell ratio of 3.20 implies that the stock is undervalued by 62.10% from its normalized five-year average.
Finally, Netflix has a Piotroski F score of 6 out of 9, which means that the company’s balance sheet, liquidity and operational performance are consistent. Therefore, the aforementioned valuation metrics are likely to remain valid unless a systemic shock occurs.
Based on recent data and its key business drivers, Netflix’s stock is full of potential. The company’s ad revenue could fuel growth and buy time for its subscription segment to promote new ideas. Additionally, the key metrics imply that the stock is undervalued, with built-in growth being a key feature.