Netflix Stock Surges on Strong Q4 Results, Future Cash Flow Could Boost Value

Netflix stock is experiencing a significant surge after the company’s remarkable Q4 2023 results, with shares skyrocketing over 12% to reach $552.63. However, industry experts believe that NFLX stock has even more growth potential and could be valued at $625 or higher. This projection is primarily based on the company’s anticipated noteworthy free cash flow (FCF) over the next 12 months.

Previous analyses have highlighted the massive FCF generated by Netflix, including articles published on January 7th and December 12th, 2023. The company’s recent report confirmed that its FCF reached an impressive $6.925 billion for the entirety of 2023, accounting for 20.5% of its total revenue of $33.725 billion. These figures are expected to improve further in the upcoming year. Netflix projects a 4% sequential increase in revenue for Q1 alone, which suggests a potential revenue growth of over 16% in the next year.

Economists now estimate that the company’s revenue could reach $42.60 billion by 2025, compared to the projected $37.50 billion for 2023. Therefore, sometime within the next year or beyond, Netflix may be on track to achieve a $40 billion revenue run-rate. This implies a potential 18.6% increase in sales on a run-rate basis and suggests that FCF could reach $8.21 billion (obtained by multiplying $6.925 billion by 1.186, the estimated FCF growth rate).

It is likely that the FCF margin will continue to rise in the future, considering the large proportion of revenue generated from new memberships and the exponential growth in ad revenue. As a result, with lower expenses associated with acquisitions and new ad revenue, Netflix’s FCF is expected to grow.

This estimate of an $8.2 billion FCF has significant implications for NFLX stock’s value. By using a 3.0% FCF yield metric, 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 3.0% metric represents the dividend yield the stock could achieve if 100% of its FCF was paid out as dividends, which is similar to its existing FCF yield of 3.2% ($6.925 billion divided by its $215.4 billion market cap).

Thus, NFLX stock might be valued up to 27% higher than its previous price of $492.19 per share, resulting in a price target of $625.08 per share. Even with its surge today, this means the price of the stock is still 13% lower than the potential target.

The powerful FCF forecast also suggests that analysts will likely revise their price targets. Before the Q4 results, the average price target of 42 analysts surveyed by Barchart, a sell-side analyst tracking service, was $558.27. Therefore, it is expected that these price targets will increase significantly in the coming week as analysts take the strong FCF into account.

Netflix’s robust FCF is anticipated to drive a notable increase in the value of NFLX stock in the future, potentially reaching the $625 per share range or higher.