Netflix Inc. (NASDAQ:NFLX) Emerges as a Prime GARP Stock Candidate

For investors looking for a mix of strong expansion and fair cost, the "Growth at a Reasonable Price" (GARP) or "Affordable Growth" method presents a strong middle path. This method tries to find firms that are increasing their profits and sales at a good rate, but whose stock prices are not at extreme levels that allow for little margin of safety. It avoids the limits of pursuing risky, high-priced stocks and accepting static value choices, concentrating rather on businesses with good core operations that are still advancing. One stock that recently appeared from this type of filtering process is NETFLIX INC (NASDAQ:NFLX).

A Close Look at Netflix's Basic Profile

An examination of Netflix's detailed basic analysis report shows a firm with a very good operational base. The report gives Netflix a total basic rating of 7 out of 10, but this number hides outstanding results in important parts needed for a lasting growth investment. The method's need for "acceptable profit and soundness" is not only reached but surpassed, offering a steady base from which expansion can be followed.

Outstanding Profit and Financial Soundness

Netflix's operational power is its most noticeable trait. The firm gets a near-maximum score of 9 out of 10 for Profit. This comes from sector-leading margins and returns on capital, which show efficient operation and a strong market position.

• High Returns: The firm's Return on Invested Capital (ROIC) of 24.41% and Return on Equity (ROE) of 40.19% put it in the highest 5% of its entertainment sector. This shows a great ability to create earnings from its capital.
• Increasing Margins: Both Operating Margin (29.14%) and Profit Margin (24.05%) are with the best in the sector and have seen steady gains in recent years, indicating price strength and operational control.

Supporting this profit is a very good Financial Soundness score of 8. A sound balance sheet lowers risk and gives room to fund future expansion projects.

• Good Solvency: Netflix's Altman-Z score of 10.50 shows a very small chance of financial trouble, doing better than 95% of its sector. Importantly, its debt is well-supported, with a Debt to Free Cash Flow ratio of only 1.61, meaning it could pay all debt in under two years from its cash flow.
• Actions Favorable to Shareholders: The report mentions a decrease in shares available over the last year and five years, a signal of a share repurchase plan that can improve per-share numbers like earnings.

The Expansion Driver: Past Speed and Future Projections

The center of the affordable growth idea rests on a firm's capacity to provide strong, steady increase. Netflix scores an 8 on Expansion, confirming its place in a growth-focused filter. The firm displays a strong history combined with good future projections.

• Strong Past Expansion: Over the last year, Earnings Per Share (EPS) rose by 35.5%, while sales increased by 15.4%. The multi-year averages are even more strong, with EPS increasing at almost 37% each year.
• Continued Future Expansion: Experts think this speed will keep going, though at a somewhat slower rate. EPS is expected to grow over 21% yearly in the next few years, with sales expansion projected near 11.6%. This future expansion is a main part that the GARP method tries to confirm.

Pricing: The "Fair Cost" in GARP

The last, and maybe most important, part is pricing. An affordable growth stock must not be overly costly. Netflix's Pricing score of 5 shows a varied situation, but one that fits the method's aim of finding fair costs compared to growth.

• Absolute vs. Relative Pricing: On a simple level, a P/E ratio of 37.4 seems high, especially next to the wider S&P 500. However, the GARP method stresses context.
• Sector Price Reduction: Compared to its entertainment sector, Netflix's P/E and Forward P/E ratios are actually less expensive than about 76% of the industry. Its Enterprise Value/EBITDA number also suggests a relative price reduction.
• Expansion Support: The report states that Netflix's excellent profit may support a higher number, and its PEG ratio—which includes earnings expansion—is mentioned as showing a "proper pricing." The projected good earnings expansion of over 26% provides a basic reason for the present price.

Summary

Netflix offers a strong example for the Affordable Growth investment method. It is not a low-price stock, nor is it a risky new firm. Instead, it is an established sector leader that continues to report double-digit expansion in sales and earnings, all while having top-level profit and a very sound financial base. The pricing, while not low on its own, seems fair when balanced against its better expansion outline, sector place, and outstanding returns on capital. For investors looking for expansion without leaving basic rules, Netflix deserves more attention.

This review of Netflix was found using a particular Affordable Growth filter. Investors wanting to find other firms that match this outline of strong expansion, good core operations, and fair pricing can view more outcomes using the Affordable Growth stock filter.

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Disclaimer: This article is for information only and does not make up financial guidance, a suggestion, or a bid or request to buy or sell any securities. The information shown is based on supplied data and should not be the only ground for any investment choice. Investing holds risk, including the possible loss of original funds. Always do your own research and think about talking with a registered financial guide before making any investment choices.