In this final part of the series, we’ll look at some key metrics investors can use to compare values of media companies. We’ll specifically look at media valuation multiples, which may be used to value conglomerates.
Some of the usual valuation multiples for companies are PE (price-to-earnings), EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization), PCF (price-to-cash-flow), and PFCF (price-to-free-cash-flow).
Price-based multiples take into account value from a shareholder’s perspective. EV-based multiples help investors understand the value of the company from the point of view of a company’s holders of sources of capital. These are forward multiples based on expected values of the denominator after a year.
Is Netflix overvalued?
As the graph above indicates, Netflix (NFLX) has a high forward EV-to-EBITDA multiple of 40.8x and a PE multiple of 79.5x. In contrast, The Walt Disney Company (DIS) has a forward EV-to-EBITDA multiple of 9.7x and a PE multiple of 15.6x. Peers 21st Century Fox (FOXA), Time Warner (TWX), and CBS (CBS) have forward EV-to-EBITDA multiples of 9.7x, 8.9x, and 9.6x, respectively.
Netflix’s value proposition
Netflix is facing increased competition in the United States when it comes to streaming of videos, as media companies go direct-to-consumer and new players enter the market. In international markets, Netflix continues to expand rapidly, but it hasn’t yet turned profitable. The company also faces other challenges in international markets, including susceptibility to currency fluctuations, language barriers, and varying Internet speeds.
It remains to be seen how Netflix will withstand the competition in domestic markets and overcome the challenges internationally.
Netflix makes up 0.87% of the PowerShares QQQ ETF (QQQ), which has a 4.7% exposure to the television sector.