Is Netflix Worth the Money?

The third quarter performance of Netflix (NFLX) was not impressive. The quarter showed revenue of $1.7 billion compared to the revenue of $1.4 billion for the same quarter last year. In addition, the revenue from the domestic segment was $1.0 billion compared to $877 million for the same period last year, while international revenue scaled up to $516 million from $345 million for the third quarter last year. However, the revenue derived from domestic DVDs went down to $157 million from $494 million for the same quarter last year.

Increasing costs are a headwind

Moving ahead to expenses, the cost of revenue inclined to $1.2 billion from $954 million for the same quarter last year, the market expenses rose to $208 million compared to $154 million for the same quarter last year.
Technology expenses rose to $171 million compared to $120 million for the same quarter, and the general and administrative expenses increased to $110 million from $78 million for the last year’s same quarter.

Netflix’s operating income dropped to $73 million from $110 million for the third quarter, 2014. Additionally, adjusted EBITDA declined to $140 million from $154 million for the third quarter 2014. Going forward, the diluted earnings per share fell to $0.07 for the quarter from $0.14 for the same quarter last year.

In addition, cash flow in operating activities increased to $195 million from $37 million for the same period last year. Further, the Cash flow in investing activities increased to $47 million from $20 million for the previous year’s third quarter, whereas the cash flow from financing activities scaled up to $72 million from $30 million for the third quarter last year.

Moving forward to valuations

The trailing P/E ratio is 247.15 compared to the Forward P/E ratio of 344.47, meaning that the earnings of the company will decrease in the coming time. Further, the PEG ratio of the company is 33.40 compared to industry’s PEG ratio of 1.36 meaning that the company will have to pay very high for its future growth earnings. In addition, the Price/Sales ratio was 7.65. The current ratio went up to 1.67 from 1.50 for the same quarter, 2014.

Netflix’s moves

In order to sustain its competitive edge, Netflix is taking various measures. The company has expanded its partnership with Apple related with its in-app purchase from Apple TV to iPad and iPhone.

Additionally, Netflix and Virgin America have entered into a partnership which will allow members access to full Netflix service in the sky at 35,000 feet on Virgin America’s newly upgraded aircraft. Such partnerships will help the company to achieve its goal of bringing the Netflix streaming to its members whenever and wherever they want.

Netflix will be expanding itself into Singapore, Taiwan, South Korea and Hong Kong as a part of its global expansion.

Moving ahead, the company will also be launching its original first feature film on Netflix named “Beasts of No Nation” which will be featuring Abraham Attah and Idris Elba.

In addition, Netflix is expected to spend around $5 billion in 2016 on content acquisition. Currently, it spends 10% on original content from content expenditure which will be raised to 50% as it believes that original content will help the company to strengthen its brand and will raise its viewing hours.

Conclusion

Netflix delivered a weak performance last quarter, but it can improve in the long run. So, investors should consider going long.
Published on Nov 20, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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