NETFLIX INC (NASDAQ:NFLX): A Strong Affordable Growth Pick with Solid Fundamentals

Investors looking for growth opportunities at fair prices often consider the "Affordable Growth" strategy, which focuses on companies with strong growth potential and reasonable valuations. This method selects stocks with a growth rating above 7, good profitability and financial health, and a valuation score above 5, ensuring the company is not overpriced. NETFLIX INC (NASDAQ:NFLX) meets these conditions, making it a strong option for investors seeking growth at a fair price.

Growth: A Key Factor

Netflix’s growth metrics are impressive, with a ChartMill Growth rating of 8. The company has shown steady increases in revenue and earnings:

• Revenue Growth: Revenue rose by 14.84% over the past year, with a five-year average of 14.11%, showing consistent growth.
• Earnings Per Share (EPS) Growth: EPS grew 46.69% in the last year, with a five-year average annual growth of 36.86%, reflecting strong performance.
• Future Expectations: Analysts predict annual EPS growth of 20.15% and revenue growth of 11.09%.

These numbers highlight Netflix’s ability to maintain growth, a key consideration for investors focused on scalable businesses.

Valuation: Fair Price for Potential

Netflix’s valuation score of 5 suggests a neutral position, but some metrics show it is not overly expensive compared to its industry:

• P/E Ratio: At 49.37, Netflix is higher than the S&P 500 average (26.82) but cheaper than 72.6% of its entertainment industry peers.
• Forward P/E: At 36.44, Netflix aligns with the broader market and is more attractive than 65.75% of competitors.
• Enterprise Value/EBITDA: This ratio indicates Netflix is cheaper than 67.12% of industry peers, supporting its relative affordability.

The PEG ratio, which factors in growth, suggests Netflix’s higher price may be justified by its earnings potential.

Profitability and Financial Health: A Strong Base

Netflix’s profitability (rated 8) and financial health (rated 8) provide a solid foundation for continued growth:

• Profit Margins: A 24.58% net profit margin and 29.51% operating margin rank Netflix among the top in its industry, outperforming 95.89% and 97.26% of peers.
• Return Metrics: High Return on Equity (41.07%) and Return on Invested Capital (24.32%) show efficient use of capital.
• Balance Sheet Strength: A reasonable debt-to-equity ratio (0.58) and strong free cash flow coverage of debt (1.70x) reduce financial risk.

These factors align with the Affordable Growth strategy’s focus on companies that are growing and financially stable, offering potential with limited downside.

Why These Criteria Are Important

The Affordable Growth strategy emphasizes companies that combine growth with fair valuations to avoid overpaying. Netflix’s growth, profitability, and financial strength make it a candidate for investors interested in the streaming sector without taking on excessive valuation risk.

For more details on Netflix’s fundamentals, see the full fundamental analysis report here.

Find More Affordable Growth Stocks

Netflix is one example of a stock that fits this strategy. Investors can discover other options using the Affordable Growth stock screener, which filters for companies with similar growth, valuation, and financial health traits.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research or consult a financial advisor before making decisions.