Netflix FCF Valuation and Final Stock Price:
Netflix has built their pro forma projections and valuation model around a key set of assumptions on key drivers of the business over a ten year explicit forecast period, followed by a terminal value calculation.
Revenue Growth Rates:
Netflix has assumed strong top-line growth over 2023-2033, starting at nearly 21% next year and gradually decelerating to 5% growth by 2033. These growth rates have been benchmarked based on independent industry analysis projecting continued rapid growth in global streaming and Netflix’s historical performance exceeding expanded total addressable market growth. Growth is expected from further penetration internationally in Asia Pacific, continued proliferation of smart TVs globally enabling Netflix’s app, and steady price increases within existing markets. Even mature territories like Canada and the US have room for subscriber growth in underpenetrated demographics.
Cost of Goods Sold (COGS):
Netflix expects cost of goods sold as a percentage of revenue to decline substantially over the next ten years, from around 60% initially down to 40% by 2033. Content costs are fixed investments amortized over larger subscription revenue, driving operating leverage over time. As the service scales, Netflix can negotiate improved deals for third party studio content. Producing owned original programming also better controls content costs longer term. Underlying these assumptions is the expectation that increased subscriber count growth and engagement will outpace growth in overall content spending.
Operating Expenses:
Selling, general, and administrative expenses are forecast to remain stable as a percentage of revenue in the low teens. While Netflix must continue investing significantly in technology, marketing, and personnel to support expansion, scale should provide leverage over other operating costs and overhead. Continued penetration into international markets requires consistent investment.
Invested Capital:
Net operating assets as a percent of revenue is estimated around -10% each year, indicating high levels of ongoing investment in content, expansion, and the core streaming platform even as the business matures. While capital intensity moderates, Netflix cannot simply stop investing in either growth or maintenance opportunities if it wants to retain its position as streaming leader.
The ten year discrete projection period sufficiently captures Netflix’s high growth phase as key streaming and international markets develop. Terminal value assumptions reflect realistic maturity beyond this timeframe.
Why 5 Percent as Long-Term Growth Rate:
Netflix is already massive in size and scale. With a market cap over $100 billion, maintaining high double-digit or even low teens growth for over a decade becomes very difficult. The law of large numbers will likely slow Netflix's growth trajectory.
While there are still international subscriber growth opportunities beyond 2033, broadband internet and smart TV penetration will gradually plateau globally limiting TAM.
Mature markets like the US and Canada are likely to be saturating, thus dampening overall company growth rates. Most households that want and can afford streaming will likely have it by 2033.
Competition will remain intense, limiting how fast Netflix can continue to grow market share and pricing power 10+ years out. The streaming market should grow in aggregate, but will get divided among major players like Disney, Amazon, HBO Max etc.
Shifting consumer entertainment preferences and new platforms could emerge beyond 2033 that may disrupt Netflix's growth and require reinvestment. Hard to predict game-changers over a decade away.
Given these limitations likely to affect growth in the very long run, bringing their terminal growth rate down to a reasonable 5% seems prudent. 5% terminal growth implies Netflix will still be a relevant force in media/tech and continues gaining share of total entertainment wallet and time - but massive growth becomes unrealistic perpetually. The FCF model already bakes in robust expansion over the explicit 10 year period.
Final Stock Price Justification:
Based on the detailed 10-year Free cash flow analysis and supporting assumptions just outlined, I arrived at a fiscal year-end 2032 valuation for Netflix of $206.6 billion for the equity value. Key drivers leading to this valuation include:
Robust top-line growth over the next 10 years, achieving over 20% revenue CAGR as Netflix sustains strong additions of international streaming subscribers.
Improving cost structure, with COGS as a percent of sales falling from nearly 60% to 40% by 2033. This 300 bps improvement comes from amortizing more initial content investments over a wider member base over time.
Stable SG&A costs around 13% of revenue annually, implying investments in marketing, technology, and personnel scale well relative to top-line expansion. There may even be slight cost leverage on secondary operating expenses like offices, travel and professional fees.
Consistent heavy investment in producing owned content, licensing new shows/movies, expanding operations globally, and enhancing the streaming platform. This fuels customer acquisition and revenue growth.
The projected revenue growth through 2032 is achievable based on Netflix's strong performance historically across both US and initial international markets. The company retains first-mover advantage and has executed well evolving from DVD rental to streaming leader. As global broadband connectivity, smart TV penetration, and consumer adoption of on-demand OTT content instead linear TV all increase over the next decade, Netflix stands poised to capitalize.
Combining the FCF valuation of the firm at $217 billion with excess cash assets, and subtracting debt, I arrive at an equity value for Netflix of approximately $207 billion by year-end 2032. With 438 million shares outstanding projected based on Value Line data, this translates to a current fiscal 2022 price target of $472 per share. This price target represents significant upside compared to the current share price, providing confidence in Netflix as an attractive long-term investment from a fundamental free cash flow perspective.
Sources: Post 7, 8, 9 .xlsx
https://www.statista.com/topics/842/netflix/
https://www.comparitech.com/tv-streaming/netflix-subscribers/
https://backlinko.com/netflix-users
