Netflix Stock Soars on Strong Q4 2023 Results, Potential Valuation Upside

Netflix stock is experiencing a significant surge, climbing over 12% to $552.63 following its impressive Q4 2023 results. However, experts suggest that the stock could be worth even more, potentially reaching $625 or higher, due to its substantial free cash flow (FCF) projected over the next 12 months. This remarkable FCF was highlighted in recent articles by Mark R. Hake, CFA on Barchart, including one published on January 7th titled ‘Netflix’s Powerful Free Cash Flow Could Catapult Stock Price Higher’ and another on December 12, 2023 titled ‘Netflix’s FCF Signals Massive Upside Potential for Stock’.

Netflix announced that its FCF reached $1.425 billion in Q4 2023, and for the entire year, it amounted to an impressive $6.925 billion. This accounts for 20.5% of the company’s total revenue of $33.725 billion for 2023. Experts believe this figure will only improve over the coming year, with revenue projected to increase by at least 4% sequentially in Q1 alone. If this trend continues, Netflix’s revenue could be more than 16% higher in the next year.

Analysts are now estimating that Netflix’s revenue could reach $42.60 billion in 2025, which implies a run-rate increase of approximately 18.6%. Based on this projection, FCF could potentially reach $8.21 billion, assuming the FCF margin stays flat at 20.5%. The company’s FCF is likely to rise from here, fueled by new memberships and exponential growth in ad revenue, accompanied by lower expenses for acquisitions and new ad revenue.

This $8.2 billion FCF estimate has significant implications for NFLX stock. By using a FCF yield metric of 3.0%, which represents the hypothetical dividend yield if Netflix were to pay out 100% of its FCF as a dividend, the stock could experience substantial growth. This calculation involves dividing the $8.21 billion FCF estimate by 3.0% or multiplying it by 33.33 (the inverse of 3.0%).

The resulting valuation suggests that NFLX stock could be worth approximately 27% more than its price yesterday, amounting to $273.7 billion in market cap or $625.08 per share. This target price is still 13% higher than its current trading price of $552.63 per share. Following the impressive Q4 results, analysts are expected to revise their price targets significantly in the next week or so. Prior to the earnings release, the average price target of 42 analysts surveyed by ESPN, Inc., a new sell-side analyst tracking service, stood at $492.19.

Netflix’s robust FCF presents strong potential for NFLX stock’s future valuation, and investors are eager to see how the company continues to capitalize on its growing revenue streams.