NETFLIX INC (NASDAQ:NFLX): A Prime Candidate for Affordable Growth Investing

The search for growth stocks at reasonable prices represents a core investment strategy for many market participants. This approach, often called Growth at a Reasonable Price (GARP) or affordable growth, aims to identify companies demonstrating strong expansion potential without the excessive valuations that can accompany high-flying stocks. By focusing on businesses with strong growth trajectories, sound profitability, solid financial health, and attractive valuations, investors seek to balance the pursuit of returns with prudent risk management. One company that recently surfaced through such a screening methodology is NETFLIX INC (NASDAQ:NFLX).

Growth Trajectory

A cornerstone of the affordable growth strategy is identifying companies with a demonstrated and expected strong growth profile. Netflix displays exactly this characteristic, earning a high growth rating of 8 out of 10. The company's historical performance and future projections paint a picture of a business in a strong expansion phase.

• Earnings Per Share (EPS) has grown by an impressive 35.48% over the past year, with an average annual growth of 36.86% over recent years.
• Revenue increased by 15.41% in the past year and has shown a strong average yearly growth of 14.11%.
• Looking ahead, analysts project EPS growth of 22.82% on average for the coming years, alongside an expected Revenue growth of 11.77% annually.

This consistent and strong growth across key financial metrics is essential for a GARP strategy, as it provides the fundamental "growth" component without which the valuation would be irrelevant.

Compelling Valuation

The "reasonable price" aspect is where many growth stories falter, but Netflix stands out with a perfect valuation rating of 10. This indicates the market may be pricing the stock at a level that does not fully reflect its growth and profitability, a key find for value-conscious growth investors.

• The Price/Earnings (P/E) ratio sits at 4.77, which is not only significantly below the S&P 500 average of 25.51 but also cheaper than 95% of its industry peers.
• The Price/Forward Earnings ratio is 3.46, indicating a cheap valuation compared to both the broader market and 100% of companies in its industry.
• Metrics like the Enterprise Value to EBITDA and Price/Free Cash Flow ratios also point to a valuation that is attractive relative to the entertainment sector.

For investors employing an affordable growth screen, this combination of low valuation multiples with high growth rates is the central target, suggesting a potential opportunity where the market has not yet fully priced in the company's prospects.

Profitability and Financial Health

While growth and value are the primary screens, the strategy also requires decent underlying financial strength to mitigate risk. Netflix performs well here, having a profitability rating of 9 and a health rating of 8. These high scores indicate the company's growth is built on a foundation of efficient operations and a stable balance sheet.

The company's profitability is exceptional, with key metrics far exceeding industry averages:

• Return on Invested Capital (ROIC): 24.41%
• Return on Equity (ROE): 40.19%
• Profit Margin: 24.05%

From a financial health perspective, Netflix demonstrates strong solvency. Its Altman-Z score indicates a low risk of bankruptcy, and its debt is well-covered by free cash flow, with a Debt-to-FCF ratio of just 1.61. This financial resilience is critical, as it suggests the company can fund its future growth initiatives without over-leveraging its balance sheet.

A detailed breakdown of these fundamental ratings is available in the full fundamental analysis report for NFLX.

Conclusion

NETFLIX INC presents a strong case for consideration within an affordable growth framework. The company pairs a powerful growth engine, evidenced by strong historical and projected increases in revenue and earnings, with a valuation that appears undemanding relative to both the market and its industry. This is further supported by top-tier profitability and a financially healthy balance sheet, reducing the risks often associated with high-growth investments. While the broader market shows a mixed trend, with the S&P 500's long-term trend negative and short-term trend positive, individual stock selection based on strong fundamentals remains a viable approach.

This analysis of Netflix was identified using a predefined screen for affordable growth stocks. Investors interested in discovering other companies that meet similar criteria of strong growth, reasonable valuation, solid profitability, and good financial health can explore more results through the Affordable Growth stock screener.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an endorsement of any investment strategy. All investments involve risk, including the possible loss of principal. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.