Netflix, Inc. (NFLX): Is It Destined for Greatness?

Netflix, Inc.Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Netflix, Inc. (NASDAQ:NFLX) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Netflix’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Netflix’s key statistics:

NFLX Total Return Price Chart

Source: NFLX Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 116.1% Pass
Improving profit margin (88%) Fail
Free cash flow growth > Net income growth (106.7%) vs. (85.2%) Fail
Improving EPS (85.4%) Fail
Stock growth (+ 15%) < EPS growth 198.9% vs. (85.4%) Fail

Source: YCharts. * Period begins at end of Q4 2009.

NFLX Return on Equity Chart

Source: NFLX Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity (93.8%) Fail
Declining debt to equity (54.8%) Pass

Source: YCharts. * Period begins at end of Q4 2009.

How we got here and where we’re going
Netflix’s performance — with the exception of the huge bounce in its stock price — has not been pretty. Investors have to be wondering what’s behind that big bounce and whether it will hold up over the long term. Netflix, Inc. (NASDAQ:NFLX) needs to really clamp down on its costs to improve on a two-out-of-seven performance here. Can it, or will it? Let’s dig a little deeper.

The big news this year isn’t so much Netflix’s progress (although it’s made some), its new in-house shows (although more seem to emerge every week), or its subscriber growth (although that continues apace.) The real story for Netflix shareholders is undoubtedly the massive earnings-related price spike that seems to say “It’s nothing but clear skies ahead.” As a result, much of the commentary has since focused on the share price, and Netflix’s ability to sustain it. Here’s a brief list of some good starting points for further valuation-based research:

Steve Symington’s “How Long Can Netflix Keep Rising?

Rick Munarriz’s “Netflix: Next Stop $225?

Adam Levine-Weinberg’s “Netflix May Not Be Worth as Much as You Think

Anders Bylund’s “What is Netflix Really Worth?