Netflix stock is much cheaper compared to its peers
Earlier in this series, we discussed how investors punished Netflix (NFLX) stock as its earnings came in below expectations. The stock declined by 26% in the after-market hours on the day the earnings were announced. However, after this decline, Netflix stock has become much cheaper than before.
The stock is also cheaper when we compare Netflix with other media companies. As the chart below shows, the EV/EBITDA[1. Enterprise value to earnings before interest,tax, depreciation, and amortization] ratio for Netflix is 7.4. The corresponding ratios for Google (GOOG)(GOOGL), Amazon (AMZN), and Facebook (FB) are much higher than Netflix’s ratio.
Netflix’s growth prospects are huge
The important thing you need to note here is that Netflix continues to grow its business at a rapid pace even though its subscriber growth didn’t meet Wall Street expectations last quarter. Netflix mentioned that it provides its internal forecast for subscriber growth and expects it to miss expectations pretty frequently. It’s indeed true that Netflix frequently misses its subscriber growth forecast. The company over-forecasted subscriber growth in the last quarter but under-forecasted the growth in the three quarters prior to the last quarter.
More importantly, the future growth prospects for the company are huge—especially in emerging markets. Internet penetration in China and India is increasing rapidly, which is also a plus for Netflix when it decides to enter these countries in future. According to Internet World Stats, Internet penetration in China is ~47%, while it’s ~16% in India. So these countries promise high growth potential for Netflix.