NFLX is Undervalued

DCF Analysis of Netflix suggests it is undervalued

May 27, 2021

Netflix (NFLX), a company known for its high growth has surprisingly found itself on the undervalued list during recent analysis using our calculator. Before we break down the results, a quick background of DCF Tool can be found here.

Input Parameters

While our default analysis predicts an astounding 31.8% growth rate, when you consider Netflix as a whole, I don't think using historical performance is useful. Netflix has seen tremendous growth in the past 5 years, exceeding even their own expectations. However, moving forward gaining new members and continuing this growth will present an even greater challenge to the company.

With additional competition and an already large market presence, there are not as many avenues for them to continue this high growth. Reviewing estimates from multiple sources, I believe a 14% growth rate is a more conservative and realistic rate, which is what will be used for this analysis.

As of this article, the WACC (discount rate) is calculated to be 8.5%. This is a relatively safe discount rate when considering other investment opportunities that could be expected to return 8-11%. We will therefore leave this value at the default result.

For this model we will also leave the Terminal Rate at the standard 2%.

More Parameters

For an added margin of safety, I have chosen to adjust the growth period from the default of 5 years down to just 3. While Netflix has proven for many years to be the industry leader, I do feel that market factors will restrict them from seeing their historic growth rates. As such, predicting 14% for just the next 3 years protects us from being overly optimistic about their future prospects.


DCF analysis of Netflix (NFLX) results

Based on these inputs, Netflix is undervalued by 29% from its current stock price of approximately $490. This is very interesting considering it is both a high growth company and the market is near all-time highs- which creates very few undervalued opportunities.

Safety Check

Something I use as a gut check with DCF Tool is removing the growth rate entirely and assuming it will only expand by 2% per year. This helps to protect if any of your assumptions, in this case the growth rate, are significantly off. For Netflix, that still results in a 14% discount.

DCF analysis of Netflix (NFLX) results with conservative parameters

Simply put, even if Netflix grew by just 2%, or roughly the average rate of inflation, it is still trading at 14% below its current intrinsic value.

Considering this safety check along with the expected growth rate case, Netflix presents a strong case for it being an undervalued opportunity to consider.

Disclosure: DCF Tool (I/we) have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from advertising/affiliate links). DCF Tool has no business relationship with any company whose stock is mentioned in this article.