Netflix Stock Soars 12% on Massive Free Cash Flow, Still Undervalued

Netflix (NFLX) stock is surging today, up over 12% to $552.63 after its fantastic Q4 2023 results. But NFLX stock is still worth considerably more, as much as $625 or more. This is based on its powerful free cash flow (FCF) over the next 12 months.

I highlighted the company’s massive FCF in my past two Barchart articles, including this one on Jan. 7, “Netflix Stock May Rise 27% Based On Its Massive Cash Flow and this one on Dec. 12, 2023, “Netflix’s Q4 Cash Flow Could Send Its Stock Soaring“.

As it turns out Netflix reported yesterday that its FCF hit $6.925 billion during all of 2023. That works out to 20.5% of its total $33.725 billion in total revenue for 2023. This can only improve over the coming year. For example, in Q1 alone the company projects its revenue will rise 4% sequentially in the next quarter. At that pace, the company’s revenue could be over 16% higher in the next year.

In fact, analysts now project that 2023 revenue will be $42.60 billion in 2025. So, sometime over the next year or thereafter Netflix could be on a run-rate to hit $40 billion in revenue.

That means sales could be 18.6% higher on a run-rate basis, and implies that FCF could reach $8.21 billion (i.e., $6.925b x 1.186). That assumes that its FCF margin stays flat at 20.5%.

It’s likely to rise over time from here, given that a huge portion of revenue is coming from new memberships that previously were shared. In addition, ad revenue is also set to grow exponentially. As a result, the cost of acquisitions and new add revenue come with lower expenses, leading to higher FCF.

This $8.2 billion FCF estimate has huge implications for NFLX stock. For example, using a 3.0% FCF yield metric, the stock could rise substantially from here. This is seen by dividing the $8.21 billion FCF estimate by 3.0% (i.e., $8.21b / 0.03 = $273.7 billion). That is also the same as multiplying it by 33.33 (i.e., the inverse of 3.0% is 33.33x).

The reason that we use a 3.0% metric is because this is the likely dividend yield the stock would achieve if the company were to pay out 100% of its FCF as a dividend. Moreover, this is close to its existing FCF yield (i.e., $6.925b/$215.4 billion market cap = 3.2%).

In other words, NFLX stock could be worth 27% more (i.e., $273.7b/$215.4b) than its price yesterday ($492.19 per share). That puts the price target at $625.08 per share.

This is still 13% higher than its price in morning trading today ($552.63).

It also means analysts will likely increase their price targets. For example, before the results released yesterday, the average price target of 42 analysts surveyed by Barchart, a new sell-side analyst tracking service, was $625. Expect to see those target prices increase significantly over the next week or so.

The bottom line is that the company’s powerful FCF could lead to a significantly higher price for NFLX stock.