We came across a bullish thesis on Netflix, Inc. (NFLX) on Substack by Margin of Sanity. In this article, we will summarize the bulls’ thesis on NFLX. Netflix, Inc. (NFLX)’s share was trading at $1144.43 as of May 8th. NFLX’s trailing and forward P/E were 54.08 and 46.08 respectively according to Yahoo Finance.
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Netflix can be viewed as an expensive stock due to its high P/E ratios and modest free cash flow yield, presents an intriguing case for value investors when considering the accounting treatment of its content assets. Despite its market capitalization of $467 billion and a net income of $9.27 billion, Netflix’s financials may not immediately reflect the value embedded in its extensive content library. This is due to the way amortization is accounted for, particularly for in-house produced content, such as the iconic “House of Cards.”
Unlike tangible assets, which depreciate over their useful life, Netflix amortizes its content over a period, often taking up to 10 years, but with a more front-loaded approach—approximately 90% of amortization occurs within the first few years. As a result, much of the content Netflix has created over the past decade no longer holds value on its balance sheet, even though it continues to generate significant viewership and revenue. For example, shows like “House of Cards,” now over 10 years old, are treated as virtually worthless in Netflix’s financial statements despite their ongoing popularity. This disparity between the accounting treatment and actual value of the content gives rise to a potential hidden value within Netflix’s library.
While Netflix’s ongoing investment in new content is essential to its future, the long-term value of its older content, though amortized away on paper, continues to contribute to the company’s brand, viewer engagement, and potential future revenue streams through merchandising, sequels, or new formats. This nuanced understanding of Netflix’s accounting approach provides a deeper insight into the company’s financials, revealing that its content library may hold more value than initially apparent. Although Netflix may not be undervalued at current levels, investors with a long-term perspective may still find it a compelling company, given the future potential of its expanding intellectual property and the ability to generate continued revenue from existing content.
Netflix, Inc. (NFLX) is on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 144 hedge fund portfolios held NFLX at the end of the fourth quarter which was 121 in the previous quarter. While we acknowledge the risk and potential of NFLX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NFLX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
