netflix fang stocks still cheap value

Why All 4 FANG Stocks Are Still Cheap and How To Value Netflix

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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Why All 4 FANG Stocks Are Still Cheap and How To Value Netflix

The FANG stocks just keep melting up, with shares of Netflix ($NFLX) already up over 13 percent in 2017, followed by Amazon ($AMZN) which is up over 9 percent. Facebook ($FB) and Alphabet ($GOOGL, $GOOG) are the laggards up only 6.5 and 5.5 percent. There have just been eight trading days completed in 2018! The pace that the stocks are running up can just not keep up like this. But like in past quarters the run-up ahead of results is nothing new for these type of stocks, so it is likely it continues, well until we get the results.

But by historical all four FANG stop are flat out cheap, yes I just said cheap.

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Facebook and Alphabet

FB Chart

FB data by YCharts

Both Facebook and Alphabet trade just below 23 times one-year forward earnings estimates. That is cheap for these two technology giants, expected to grow earnings at 15 and 21 percent in 2019. The chart below shows that Alphabet is trading within its average forward earnings multiple, while Facebook trades at a slightly higher historical forward PE. But remember what the market was in 2016, challenging to say the least and was it was in no mood to assign a premium to any stock. So imagine what kind of multi-expansion these two stocks could see in this strong environment.

FB PE Ratio (Forward 1y) Chart

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FB PE Ratio (Forward 1y) data by YCharts

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Amazon never seems to care about earnings so trying to apply the same concept just doesn’t work, and while we all know Amazon can turn a profit when it wants to turn a profit, it makes tough to assess just how reliable earnings estimates are. A price to sales ratio seems fair and simple enough and with that Amazon trades at only 2.3 times one year forward sales, which the chart below shows, is on the upper end of the historical range, but far from expensive.

AMZN PS Ratio (Forward 1y) Chart

AMZN PS Ratio (Forward 1y) data by YCharts

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Valuing Netflix seems like an impossible task because there are so many variables that go into this guess. How many subscribers will Netflix, this year, next year, three years from now? I have not a clue. Then we need to think about how the pricing and content spend, plug all those variable into a DCF model. Good luck!

This is how I think about Netflix, pretty straightforward. Netflix’s stock price or market cap has a strong correlation to subscriber growth and revenue. So if we take the market cap of Netflix and divided it by the number of subscribers, we get the chart below.

Fang stocks are still cheap
Netflix Market Cap divided by the number of subscribers

We can see that market values each subscriber Netflix has more than it did historically, the question is why? And does that mean Netflix is currently overvalued? For that, we need to look at revenue, and how much each subscriber generates in revenue for Netflix, it is all called ARPU, but for this part, I’m going to make a slight change. Typically when figuring out ARPU, you take the revenue and divided by the number of subscribers and then divided by the number of months in the period, which is 3 for the quarter.

Notice that ARPU had been falling for many quarters in a row, before finally reversing in the first quarter of 2016. We also now that Netflix recently increased its monthly pricing, so that should again help ARPU rise this next quarter. It also helps to explain why the market is willing to pay a high multiple per subscriber today.

Netflix average revenue per user

Now let’s annualize the ARPU, we can just multiply by 12, and it tells us how much each subscriber is worth in revenue for a full year. Then one last trick, and we get the chart below.


Netflix Valuation



The chart above gives us what I call the market cap to subscriber value ratio. The market is valuing Netflix’s stock or market cap at roughly seven times the value of each subscriber, through the end of the third quarter.

If we plug-in Netflix guidance of 115 million total subscribers for the fourth quarter and consensus analyst revenue estimate of $3.283 billion, we come up with a ratio of its current value at slightly over 7. So is Netflix overvalued? With rising ARPU, and increasing subscribers growth, based on historical trend? Not by a long-shot, it seems if anything the stock is just now fairly valued, assuming no surprise to the upside.

Netflix value

That’s it!

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Michael Kramer and the Clients of Mott Capital own shares of NFLX, GOOGL

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.

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Tags: #netflix #amazon #facebook #alphabet #google #fang #fangs #stocks