Stock Analysis on Net
Stock Analysis on Net

Netflix Inc. (NASDAQ:NFLX)

Present Value of Free Cash Flow to the Firm (FCFF)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Netflix Inc., free cash flow to the firm (FCFF) forecast

US$ in thousands, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 16.50%
01 FCFF0 7,508,643
1 FCFF1 8,643,799 = 7,508,643 × (1 + 15.12%) 7,419,795
2 FCFF2 9,939,415 = 8,643,799 × (1 + 14.99%) 7,323,782
3 FCFF3 11,416,408 = 9,939,415 × (1 + 14.86%) 7,220,900
4 FCFF4 13,098,151 = 11,416,408 × (1 + 14.73%) 7,111,466
5 FCFF5 15,010,732 = 13,098,151 × (1 + 14.60%) 6,995,815
5 Terminal value (TV5) 908,008,119 = 15,010,732 × (1 + 14.60%) ÷ (16.50% – 14.60%) 423,180,993
Intrinsic value of Netflix Inc. capital 459,252,751
Less: Senior Notes (fair value) 15,948,000
Intrinsic value of Netflix Inc. common stock 443,304,751
 
Intrinsic value of Netflix Inc. common stock (per share) $1,036.35
Current share price $1,024.54

Based on: 10-K (reporting date: 2024-12-31).

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Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Weighted Average Cost of Capital (WACC)

Netflix Inc., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 438,254,259 0.96 16.95%
Senior Notes (fair value) 15,948,000 0.04 4.12% = 4.76% × (1 – 13.40%)

Based on: 10-K (reporting date: 2024-12-31).

1 US$ in thousands

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 427,757,100 × $1,024.54
= $438,254,259,234.00

   Senior Notes (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (13.00% + 13.00% + 15.00% + 12.00% + 14.00%) ÷ 5
= 13.40%

WACC = 16.50%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Netflix Inc., PRAT model

Microsoft Excel
Average Dec 31, 2024 Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020
Selected Financial Data (US$ in thousands)
Interest expense 718,733 699,826 706,212 765,620 767,499
Net income 8,711,631 5,407,990 4,491,924 5,116,228 2,761,395
 
Effective income tax rate (EITR)1 13.00% 13.00% 15.00% 12.00% 14.00%
 
Interest expense, after tax2 625,298 608,849 600,280 673,746 660,049
Interest expense (after tax) and dividends 625,298 608,849 600,280 673,746 660,049
 
EBIT(1 – EITR)3 9,336,929 6,016,839 5,092,204 5,789,974 3,421,444
 
Short-term debt 1,784,453 399,844 — 699,823 499,878
Long-term debt 13,798,351 14,143,417 14,353,076 14,693,072 15,809,095
Stockholders’ equity 24,743,567 20,588,313 20,777,401 15,849,248 11,065,240
Total capital 40,326,371 35,131,574 35,130,477 31,242,143 27,374,213
Financial Ratios
Retention rate (RR)4 0.93 0.90 0.88 0.88 0.81
Return on invested capital (ROIC)5 23.15% 17.13% 14.50% 18.53% 12.50%
Averages
RR 0.88
ROIC 17.16%
 
FCFF growth rate (g)6 15.12%

Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).

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2024 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 718,733 × (1 – 13.00%)
= 625,298

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 8,711,631 + 625,298
= 9,336,929

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [9,336,929 – 625,298] ÷ 9,336,929
= 0.93

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 9,336,929 ÷ 40,326,371
= 23.15%

6 g = RR × ROIC
= 0.88 × 17.16%
= 15.12%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (454,202,259 × 16.50% – 7,508,643) ÷ (454,202,259 + 7,508,643)
= 14.60%

where:

Total capital, fair value0 = current fair value of Netflix Inc. debt and equity (US$ in thousands)
FCFF0 = the last year Netflix Inc. free cash flow to the firm (US$ in thousands)
WACC = weighted average cost of Netflix Inc. capital

FCFF growth rate (g) forecast

Netflix Inc., H-model

Microsoft Excel
Year Value gt
1 g1 15.12%
2 g2 14.99%
3 g3 14.86%
4 g4 14.73%
5 and thereafter g5 14.60%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 15.12% + (14.60% – 15.12%) × (2 – 1) ÷ (5 – 1)
= 14.99%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 15.12% + (14.60% – 15.12%) × (3 – 1) ÷ (5 – 1)
= 14.86%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 15.12% + (14.60% – 15.12%) × (4 – 1) ÷ (5 – 1)
= 14.73%