Why Netflix Stock May Still Be Very Cheap


Why Netflix Stock May Still Be Very Cheap

Mott Capital Management, Michael Kramer

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Netflix shares may be jumping in the after-hours, by nearly 10 percent to $247, but the stock is getting more reasonably valued. It is crazy to think that expectations for the company were sky high going into this quarterly print, and the company not only beat those expectations they crushed them. The company reported that total net addition grew by 8.33 million, and impressively 2.0 million came from the US, with global subscribers exceeding 117 million.

Adding to the monster beat,  the company is guiding the first quarter net adds to 6.35 million. The results were tremendous and utterly shocking to me, far better than my wildest imagination, and apparently, the market felt the same way.


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Strong Fundamentals

What makes these numbers even more impressive is that the fundamentals reported makes shares of Netflix reasonably cheap at the current level compared to the last few quarters. If the first quarter guidance comes, true Netflix’s Annualized Average Revenue Per Subscriber will surge to nearly $119, while its Market Cap – To- Value of Subscriber Ratio falls back to 7.29, from 8.18, more on this below.

At the current pace of growth, Netflix is looking like it may reach 140 million subscribers by the end of 2018.


ARPU has been trending higher as well, and that number should continue to grow, as the price hikes in the US take full effect. Remember Netflix gives new subscribers the first 30-days for Free.

netflix arpu

The rate at which the market is now valuing each subscriber for Netflix is climbing as well and presently stands at roughly $870 per subscriber. That is because as ARPU rise, it makes the value of each subscriber worth more in-terms of future cashflow opportunities.


When you divide ARPU by the market cap per subscriber, you get what I call the Market Cap To Value per Subscriber ratio, which declined because of the strong first quarter guidance.

Still Cheap

Creating original content is working for Netflix and it seems for now as long as they are willing to spend and create good content, then the subscribers will come.

Netflix not only has the content, but at this point, it still has plenty of pricing power left as well, which means further price hikes are likely coming. In fact, with nearly 2 million subscribers in the US coming after the most recent price hike, it suggests that subscribers are still finding plenty of value from the Netflix offering.

Think about this way one year of paying for Netflix is still cheaper than the cost of my monthly cable bundle. Truth be told, in about another years times I will probably have a 5G connection on my iPhone and iPad, and since I’m already watching nearly 90 percent of Netflix from my iPad, the days of needing Cable are slowing coming to end. Even if Netflix raised the price to $25 a month, it would still be a bargain for the amount of content they offer and the amount of time spent on it.

We are still in the very early innings of this ballgame, with many innings left to play.

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Michael Kramer and the clients of Mott Capital own shares of NFLX

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 #earnings