Netflix Stock Soars on Strong Free Cash Flow, Potential for Higher Valuation

Netflix (NFLX) shares have experienced a significant surge, rising over 12% to $552.63, following the release of their impressive Q4 2023 financial results. However, despite the current boost, NFLX stock is estimated to be worth even more, potentially surpassing $625 or beyond. This valuation is based on the company’s robust free cash flow (FCF) projections for the next twelve months.

In previous articles, like the one published on Jan. 7 titled ‘Netflix’s Free Cash Flow Strength Makes Its Stock Worth More,’ and another on Dec. 12, 2023, the focus was on Netflix’s powerful FCF figures. The company recently reported that its FCF reached a remarkable $6.925 billion during 2023, accounting for 20.5% of its $33.725 billion total revenue for that year. There are expectations for this FCF figure to improve further over the upcoming year.

Netflix anticipates a 4% sequential increase in revenue for Q1 alone. If the company maintains this pace, its revenue could potentially grow by over 16% in the next year. Analysts project 2023 revenue to be approximately $42.60 billion and predicting it could reach $40 billion on a run-rate basis within the next year or so, signifying an 18.6% sales increase. This implies that FCF could reach $8.21 billion, assuming the FCF margin remains at 20.5%.

As the portion of revenue generated from new memberships continues to grow, with previously shared memberships now converted to individual subscriptions, and ad revenue expected to experience exponential growth, the cost of acquisitions and the corresponding expenses will likely decrease. These factors will lead to higher FCF margins over time.

This $8.2 billion FCF estimate has significant implications for NFLX stock. Utilizing a 3.0% FCF yield metric, the stock could soar considerably. Dividing the FCF estimate by 3.0% yields a value of $273.7 billion, or multiplying it by 33.33, the inverse of 3.0%, provides the same result. The 3.0% metric is derived from the likely dividend yield the stock would achieve if the company paid out 100% of its FCF as a dividend. Additionally, this closely aligns with the stock’s existing FCF yield of 3.2% based on its FCF market cap ratio.

Overall, this calculation implies that NFLX stock could be valued 27% higher than its previous closing price of $492.19 per share, potentially reaching $625.08 per share. Even at its current trading price of $552.63 per share, this valuation represents a 13% increase. It is highly probable that analysts will revise their price targets considerably higher in the following weeks, considering these predictions.

The bottom line is that Netflix’s robust FCF has the potential to significantly increase the valuation of NFLX stock.