Netflix Stock Surges After Strong Q4 2023 Results, FCF Could Push Stock Price Higher

Netflix (NFLX) stock witnessed a significant surge of over 12% to reach $552.63 following the release of its impressive Q4 2023 results. However, analysts believe that the stock could still hold a higher value, potentially reaching $625 or even more. These estimations are based on the company’s robust free cash flow (FCF) projections over the next 12 months.

In his previous articles on January 7th and December 12th, 2023, Mark R. Hake, CFA, highlighted the tremendous FCF growth potential of Netflix. The company’s financial report yesterday confirmed that its FCF amounted to $6.925 billion during the entirety of 2023, representing 20.5% of the total revenue of $33.725 billion. These figures are likely to improve further in the coming year.

For instance, Netflix projects a 4% sequential increase in revenue for Q1, indicating that revenue could be over 16% higher in the next year. Analysts even forecast a revenue range between $41.80 billion and $42.60 billion in 2025. This suggests that Netflix might reach a run-rate revenue of $40 billion, signifying an 18.6% increase. If the FCF margin remains constant at 20.5%, the FCF could surge to $8.21 billion.

Netflix’s FCF is expected to rise further due to a significant portion of revenue generated from new memberships that were previously shared. Additionally, the exponential growth of ad revenue will lead to lower expenses and higher FCF. This $8.2 billion FCF estimate has substantial implications for NFLX stock.

Using a 3.0% FCF yield metric, which assumes the company pays out 100% of its FCF as dividends, the stock could potentially soar. Calculating by dividing the FCF estimate of $8.21 billion by 3.0%, or multiplying it by 33.33 (the inverse of 3.0%), NFLX stock could be worth $273.7 billion. This value represents a 27% increase compared to the stock’s previous closing price of $492.19 per share, equivalent to a price target of $625.08 per share.

Currently trading at $552.63 per share, this implies that analysts will likely raise their price targets for NFLX stock in the coming week. Prior to yesterday’s results, the average price target among 42 surveyed analysts on Barchart, a new sell-side analyst tracking service, was [previous average price target].

To sum up, Netflix’s strong FCF performance could propel NFLX stock to achieve a significantly higher price in the market, potentially exceeding the current surge.