Netflix Stock Surges on Strong Q4 Results, FCF Indicates Potential Upside

Netflix (NFLX) stock is experiencing a significant surge today, rising over 12% to $552.63 following the release of its impressive Q4 2023 results. However, according to its robust free cash flow (FCF) projections for the next 12 months, NFLX stock could be worth much more, potentially exceeding $625 per share.

I recently highlighted the company’s substantial FCF in my previous articles, particularly focusing on the immense growth potential observed on January 7th in an article titled ‘Netflix’s Free Cash Flow Puts Its Stock Price Around $610’, and on December 12, 2023, with an article titled ‘Netflix’s Growth Could Push Its Stock Price Above $603’.

Yesterday, Netflix reported that its FCF reached an astonishing $6.925 billion in 2023, equivalent to 20.5% of its total revenue of $33.725 billion for the same year. This indicates a strong possibility for further improvement in the coming months. For instance, the company’s revenue is projected to rise by 4% sequentially in Q1 alone. If this trend continues, the revenue could potentially increase by over 16% in the next year.

Industry analysts forecast that Netflix’s revenue will reach $42.60 billion in 2025, portraying a continuous growth trajectory. Therefore, within the next year or so, Netflix could be on track to achieving $40 billion in revenue, reflecting an 18.6% increase on a run-rate basis. As a result, the FCF could potentially reach $8.21 billion (i.e., $6.925 billion x 1.186), assuming the FCF margin remains steady at 20.5%.

Given these estimates, the implications for NFLX stock are substantial. By utilizing a 3.0% FCF yield metric, it is possible for the stock to experience significant appreciation. Dividing the $8.21 billion FCF estimation by 3.0% ($8.21 billion / 0.03 = $273.7 billion) or multiplying it by 33.33 (i.e., the inverse of 3.0%) would yield the same value. A 3.0% metric is used as it suggests the dividend yield the stock would achieve if the company were to pay out 100% of its FCF as a dividend, which is comparable to its existing FCF yield of 3.2% (i.e., $6.925 billion / $215.4 billion market cap).

This analysis suggests that NFLX stock may be worth approximately 27% more than its previous price, corresponding to $273.7 billion / $215.4 billion, resulting in a potential target price of $625.08 per share. Consequently, analysts are likely to raise their price targets for the stock, considering the pre-results average price target of $610 established by 42 surveyed analysts on Barchart‘s new tracking service.

All in all, Netflix’s robust FCF indicates significant potential for NFLX stock to experience substantial price appreciation in the future.