Netflix Inc (Netflix) offers subscriptions where members enjoy TV series, games, and films across a wide range of genres and languages as much as they want, at any where, any time in 190+ countries worldwide. As I write, Netflix is valued at US$ 293.4 billion in market capitalisation. In this article, I’ll share 5 major things that I discovered after studying Netflix’s annual reports. They are as follows: 


1. Geographical Markets

Netflix began renting DVDs by mail in 1997. Then, it went public in 2002. Netflix subsequently introduced streaming in 2007, offering members unlimited access to entertainment with membership fees. Today, the fees range between US$ 1 – US$ 28 per month and such fees now contribute 100% of its revenues as Netflix had discontinued its DVD business in 2023. 


Beginning in the US, Netflix subscriptions are now available in 4 regions namely, (1) the US and Canada, (2) EMEA, (3) Latin America and (4) Asia Pacific. In terms of revenues, the US and Canada remain the largest contributor to Netflix’s sales in 2023. The EMEA and Asia Pacific regions contributed the fastest sales growth at a CAGR of 28.34% and 36.73% in 2017-2023 respectively. 

Note: 
EMEA refers to Europe, Middle East, and Africa. 


2. Membership + Monthly Revenue

In 2014-2023, the number of Netflix’s paid membership has grown at a CAGR of 18.98% from 54.5 million to 260.3 million. This is mainly attributed to growth in subscribers in all regions, particularly EMEA and Asia Pacific regions where their growth rates were the fastest and exceeded the US, Canada and Latin America. 

Netflix raised its average monthly revenue per paying membership (MRPP) over the past 10 years. It grew from US$ 8+ levels in 2014-2016 to US$ 11+ levels for the past 3 years in 2021-2023. 


3. Profitability

Netflix’s revenues have grown at a CAGR of 22.66% from US$ 4.4 billion in 2013 to US$ 33.7 billion in 2023, reflecting its rise in paid memberships in the period. 

Netflix was able to scale its revenues without incurring heavy capital. As such, it had improved its net profit margin (NPM) from <5% levels in 2013-2016 to now, hitting 15+% levels in 2021-2023. Hence, net profits had increased at a CAGR of 47.31% from US$ 112.4 million in 2013 to US$ 5.4 billion in 2023. 


4. Cash Flow Patterns

Despite rising profits, Netflix hasn’t always been cash flow positive. 

In 2015-2019, Netflix had incurred US$ 9.6 billion in operating cash outflows. At that period, the amount invested in increasing streaming content had exceeded the amount of cash brought in from membership fees. During this period, it has raised this shortfall with borrowings and as such, lifted Netflix’s long-term debt from US$ 0.9 billion in 2014 to US$ 14.8 billion in 2019. 

In 2020-2023, Netflix generated US$ 12.1 billion in operating cash flows. Hence, there is a reversal in its cash flow pattern. This allowed Netflix to repay as much as US$ 190.5 million in long-term debt & US$ 6.0 billion in net share buybacks. 


5. Valuation

The P/E Ratio of Netflix was well above 30 for most years in 2014-2023. There is only one exception in 2022 when its lowest P/E Ratio was around 17-18. Such is due to a 70+% drop in stock price of Netflix’s shares, from near US$ 700 level to US$ 175+ level in that period. This is due to heightened fear as Netflix recorded a dip in US paid memberships and slower growth in paid memberships in its key regions: EMEA, Latin America and Asia Pacific in 2022. 


This is a situation where the investment community is willing to pay a higher PE for as long as a company can keep up with its growth rate. But, if a stock fails to meet the community’s growth expectation, the stock is viewed negatively, thus, causing its price to tumble as quickly. Hence, that is the case for Netflix in 2022. Obviously, investors who can look past “1-2 disappointing quarters or year” can capitalize on this 2022 valuation. Now, they are handsomely rewarded. 


Conclusion: 

The strategy of raising debts to finance content investments & global expansion in 2015-2019 had paid off handsomely as it brought in its greatest sales, profits, and positive operating cash flows in 2020-2023. It has a marginal growth hiccup in 2022 which caused a huge tumble in stock price. But in 2023, its growth rates for paid memberships in all regions had recovered and such has caused its price to skyrocket in 2023 back to 2021 levels.

The lessons I gathered from this study are as follows: 


1. High PE for a stock is justifiable for a stock that is fast-growing in its profits. In Netflix’s case, its valuation is highly dependent on its ability to keep on adding / growing its paid memberships over the long-term. 


2. This makes its stock price more sensitive to growth rates. As written, Netflix’s stock price fell by 70+% in 3-4 months resulting from “1 year of slower growth”. That is the risk investors take, if their basis for investing in stocks are immensely focused on growth rate. 


3. Of course, investors could invest or add onto their positions in Netflix when it was trading below US$ 200 a share in 2022. But what if you happen to be a guy, who had US$ 1 million in Netflix and this accounted for >30% of your own stock portfolio in 2021? In 2022, you would have experienced a huge fall in net worth and confidence. Would you be emotionally stable enough to invest more shares of Netflix at discounted prices? Such may not be easy to do if one is untrained / inexperienced. 


Hence the saying – “Investing is simple but not easy”. 

There you go, the 5 things to know about Netflix before investing in it.

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Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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