For investors looking to balance the search for growth with some caution, the "Growth at a Reasonable Price" or "Affordable Growth" method presents a sensible option. This method tries to find companies that are increasing their earnings and sales at a good rate while also being priced at levels that do not assume flawless future performance. By looking for stocks with good growth scores, stable profit and financial condition, and a price that is not too high, investors can search for chances where a company's prospects may not be completely reflected in its stock price. One stock that recently appeared from this sort of search is NETFLIX INC (NASDAQ:NFLX).
A Good Growth Picture
The central idea of an affordable growth method is, expectedly, growth. A company needs to show a clear ability to get bigger, with a believable plan for that to keep happening. Netflix’s fundamental report shows a good growth picture, receiving a ChartMill Growth Rating of 8 out of 10. This score is supported by notable past results and positive future projections.
- Past Speed: In the last year, Netflix increased its Earnings Per Share (EPS) by 27.43% and its Revenue by 15.85%. The record over a longer period is even more notable, with EPS increasing at an average yearly rate of 32.92% over recent years.
- Future Projections: Experts believe this speed will continue, though at a somewhat slower rate. The EPS is projected to increase by an average of 20.08% each year in the next few years, while revenue growth is estimated near 10.32%. This mix of strong past results and a sound future view is exactly what growth investors look for.
Price Consideration
A stock with excellent growth can still be a bad investment if the cost is too great. The affordable growth method specifically looks for stocks that are "not overpriced," trying to find a sensible buying point. Netflix’s ChartMill Valuation Rating is at a neutral 5. This score shows a varied situation that needs explanation.
- Simple Compared to Industry Measures: On a simple basis, common price-to-earnings (P/E) ratios seem high. The company’s P/E of 32.49 and forward P/E of 25.68 are often seen as costly. However, price consideration is rarely simple.
- Industry and Growth Adjustment: The important explanation comes from comparison. Netflix’s P/E ratios are actually lower than about 75% of similar companies in the Entertainment field, where average multiples are much higher. Also, its excellent profit and expected earnings growth of almost 22% help explain its higher price. The PEG ratio, which changes the P/E for growth, points to a fair price for the company. For a GARP investor, this implies the market is valuing Netflix for growth, but not without reason compared to its industry and possibilities.
The Base: Profit and Financial Condition
Lasting growth needs a profitable business and a good balance sheet. These are the "acceptable profit and condition" filters that guard the affordable growth method from following financially weak companies. Netflix does very well here, which adds a quality aspect to its growth narrative.
- Excellent Profit: The company gets a top ChartMill Profitability Rating of 9. Important measures are field-leading:
- Return on Invested Capital (ROIC): 25.95%, better than 98.75% of industry peers.
- Operating Margin: 29.49%, better than 97.5% of the industry.
- Profit Margin: 24.30%, better than 95% of the industry. These margins have also been getting better in recent years, showing improved operational efficiency.
- Good Financial Condition: With a Health Rating of 8, Netflix’s balance sheet is strong. Its Altman-Z score of 9.94 shows very low short-term bankruptcy danger and is better than most of the industry. While its debt/equity ratio is neutral, its free cash flow is enough to pay its debt responsibilities fast (Debt/FCF ratio of 1.53). This financial soundness gives the company the ability to spend on content and technology without risking its stability.
Summary
Netflix shows an example of the sort of company an affordable growth search intends to find. It combines a strong, shown growth driver, in both subscriber numbers and financial outcomes, with a price that, while not low, is sensible within its high-growth field. Importantly, this growth is based on a foundation of excellent profit and good financial condition, reducing the dangers often linked to high-growth stocks. It represents the GARP idea: paying a fair cost for quality growth, instead of a very high one for uncertain excitement.
For investors wanting to examine other companies that match this description of good growth, fair price, and sound basics, you can see the full Affordable Growth screen results.
A detailed look at Netflix's fundamental positives and negatives is in its complete Fundamental Analysis Report.
Disclaimer: This article is for information only and is not financial advice, a suggestion to buy or sell any security, or a support of any investment plan. Investors should do their own research and think about their personal money situation and risk comfort before making any investment choices.
