Netflix Has Good Prospects Despite Recent Negative Free Cash Flow

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After Netflix (NASDAQ:NFLX) reports fourth-quarter 2021 earnings on Jan. 21, NFLX shares have fallen too far. As a result, Netflix will rebound, despite the disappointing outlook it provides for the first quarter.

At first, the stock fell like a rock to $359.70 on Jan. 26. However on February 1st, the price went back up to $457 but has since fallen again. On March 4, Netflix fell below $400 again to $367.12.

But investors need not worry too much. People aren’t going to stop streaming Netflix any time soon. Plus, there’s good news for long-term earnings prospects.

Netflix has started raising its prices again. That should help with the disappointing outlook that plagued analysts and pushed NFLX shares down.

Where Things Stand on Netflix

Revenue grew 16% in Q4 from a year earlier, but management estimates that in Q1 sales will increase by only 10.3%. Not only lower than Q4 growth rate, but significantly below last year’s 24% growth rate. This is what scares the market.

Analysts and investors are concerned that the large amount of capital that Netflix is ​​spending on content is due to heavy streaming competitors. It implies that the company could be stuck in a negative free cash flow situation for years to come.

For example, free cash flow (FCF) for the quarter was -569 million vs. -$284 million in Q4’20. Last year its FCF was negative $159, in line with his expectations for “near breakeven.”

However, Netflix wrote that they expect a positive FCF during 2022. That means they expect the quarterly FCF to reverse.

In addition, the company also estimates it will be able to reduce its outstanding debt to between $10 billion to $15 billion. This is down from $15.5 billion in gross debt at the end of 2021.

In other words, the slower growth rate that Netflix expects at least in Q1 doesn’t necessarily mean lower profits or a negative FCF for the full year. So far, the company has stuck with its guidelines, so there’s no reason not to trust it.

Where It Left NFLX Stock

Analysts are paid to be skeptical and create their own forecast model for the company. Based on Looking for AlphaThe estimated average earnings per share (EPS) for 2022 is $11.17.

This is slightly lower than the $11.24 diluted EPS it made in 2021. It also puts the NFLX at a forward price-to-earnings (P/E) multiple of 33 times.

However, for the year ending 2023, the same 35 analysts expect EPS to be 31% higher at $14.61. That lowers forward P/E multiples to just 25 times.

Usually stock Netflix has very high forward P/E multiples. Based on East Star, the average forward P/E is more than 82 times in the last 5 years. So even at half that rate or 41 times forward EPS of $14.61, the price is at least $599.01. That represents a 63% upside potential for NFLX stocks.

What to do

As a result, these analysts are still positive on NFLX stocks in terms of their 12-month price target. Average price target of 42 analysts surveyed by Looking for Alpha is $516.18, or 40% of today’s price of $367.12.

Similar results are in TipRanks.com who reported that 35 analysts had an average price target of $512.45, or 39% higher. Yahoo! Finance, which uses Refintiv analyst survey data, reports that 38 analysts have an average target of $510.19 per share. That’s 38.6% higher than the price on March 4.

So, even though my estimate is $599 higher than most analysts’ target price, the NFLX stock still looks good value.

The bottom line is that Netflix expects its content spending to attract new growth with rising prices. In short, investors’ fears may be overblown.

As of the date of publication, Mark Hake does not hold (either directly or indirectly) any position in the securities referred to in this article. Opinions expressed in this article are those of the author, subject to InvestorPlace.com Publishing Guidelines.

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