Netflix stock has fallen sharply over the past year. However, on current checks it still screens as cheap, with both earnings multiples and an intrinsic value estimate pointing to more value than the market is currently pricing in.

• Over the past 3 years, Netflix has delivered a 60.6% gain, which suggests the longer term story has rewarded investors even though recent returns have been weak.
• New revenue streams from advertising and live sports can support the cash flow outlook. At the same time, concerns about competition and the market's reaction to recent revenue forecasts remain a clear risk to how much investors are willing to pay for that cash flow.
• Netflix scores highly on the broader valuation checks, with the company looking undervalued in 5 out of 6 tests, and both the Discounted Cash Flow (DCF) intrinsic value estimate and the market multiples pointing in the same undervalued direction.

The stock's next move may depend on whether the market continues to price Netflix closer to the recent weak share-price performance or closer to what the valuation models suggest its cash flows are worth.

Is Netflix a Bargain on Cash Flow?

The Discounted Cash Flow (DCF) model here uses Netflix’s projected future cash flows to estimate what the stock could reasonably be worth today. On the current inputs, Netflix generates about $11.3b of free cash flow over the latest twelve months, and the model assumes those cash flows keep growing rather than shrinking over time.

Rolling those projections through the 2 Stage Free Cash Flow to Equity model gives an estimated intrinsic value of about $102.78 per share. Based on the inputs provided, that implies the stock screens as 33.2% undervalued relative to its current share price. The recent share price drop after Netflix’s Q3 revenue forecast miss helps explain why the market price sits below what the DCF suggests its cash flows could support.

On these cash flow assumptions, Netflix stock currently looks undervalued relative to its DCF based intrinsic value estimate.

Our Discounted Cash Flow (DCF) analysis suggests Netflix is undervalued by 33.2%. Track this in your watchlist or portfolio, or discover 50 more high quality undervalued stocks.

Is Netflix Still Cheap on Earnings?

P/E is a useful lens for Netflix because earnings are a key focus for investors in mature media and entertainment companies. On this metric, Netflix trades at about 20.9x earnings, which is close to the Entertainment industry average of roughly 21.6x and below an estimated peer group average of 66.0x.

The fair P/E ratio implied by the broader model is 28.4x. This reflects what investors might typically pay given Netflix’s size, margins and risk profile. Compared with that fair multiple, the current 20.9x suggests the stock trades at a discount on earnings, following a period in which sentiment has been affected by revenue forecast concerns and increased competition.

Taken together, the current earnings multiple suggests Netflix stock appears undervalued within this P/E-based framework.

The Netflix Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for Netflix sit between the valuation puzzle and Netflix's share price today by laying out the specific assumptions about future growth, margins and earnings that would need to hold for the stock to be worth materially more or less than it currently trades at on the market. Each Narrative ties a fair value estimate to a clear story about Netflix's possible catalysts and risks, so you can track over time which version of events appears to be unfolding on the Community page.

One of the top community narratives on Netflix: 16% undervalued

"The key question is not whether Netflix is a good business, it is whether the current share price still leaves enough room for execution risk…"

Do you think there's more to the story for Netflix? Head over to our Community to see what others are saying!

The Bottom Line

Netflix screens as undervalued on both the Discounted Cash Flow (DCF) intrinsic value estimate and its current earnings multiple, which roughly point in the same direction. That makes the stock look interesting for investors who think its cash generation and profit profile can be sustained or improved from here. The crux is whether new revenue streams, such as advertising and live content, offset competition and any pressure on future revenue forecasts. The key question now is whether that current discount reflects an opportunity in Netflix, or whether the market is correctly pricing the execution and competitive risks ahead.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.