Netflix stock has fallen 36.4% over the past year even though the Discounted Cash Flow (DCF) intrinsic value estimate currently sits above the market price. This raises the question of whether recent weakness has left the shares trading below what the cash flow outlook implies.

• Over the past 3 years Netflix has returned 94.1%, which suggests the longer term story has still rewarded investors despite the more recent pullback.
• Recent news around Bill Ackman’s Pershing Square taking a new position and Netflix nearly doubling its upfront ad commitments may support sentiment on growth and margins. At the same time, any disappointment in subscriber trends or ad monetisation could quickly weigh on what investors are willing to pay.
• Netflix screens as undervalued on both the DCF intrinsic value estimate, which points to roughly 20.5% upside, and earnings multiples. However, its 4 out of 6 value checks still leave a mixed picture rather than a clear cut bargain.

The stock’s next move may depend on whether the current discount to intrinsic value and multiples is wide enough to compensate for the business risks that investors are focused on today.

Does Netflix Look Undervalued on Cash Flow?

The Discounted Cash Flow (DCF) method estimates what Netflix might be worth today based on projected future cash generation. Netflix has latest twelve month free cash flow of about $11.3b, and the model assumes those cash flows keep growing rather than shrinking, then slow to a steadier pace over time.

Based on these assumptions, the DCF points to an intrinsic value of about $98 per share in dollar terms. This sits above the current market price and implies the stock is roughly 20.5% undervalued. Bill Ackman’s Pershing Square returning to Netflix because it views the company as a leader in streaming helps explain why some investors see the current discount as an opportunity instead of a warning sign.

On balance, the DCF workup suggests Netflix stock currently screens as undervalued relative to its projected cash flows.

Our Discounted Cash Flow (DCF) analysis suggests Netflix is undervalued by 20.5%. Track this in your watchlist or portfolio, or discover 51 more high quality undervalued stocks.

Is Netflix a Bargain on Earnings?

P/E is often a straightforward way to compare Netflix to other profitable media and entertainment companies because it ties directly to current earnings.

Right now, Netflix trades on a P/E of about 23.9x. That is above the broader entertainment industry average of roughly 20.1x, yet below the peer group average near 57.1x for similar stocks. A tailored fair P/E for Netflix, which factors in its size, margins and risk profile, is estimated at around 29.9x. This is higher than where the shares trade today.

On this basis, Netflix appears cheaper than what its earnings profile might justify, even if it no longer sits at a deep discount to the wider sector. The gap between the current 23.9x and the 29.9x fair multiple suggests the market is applying a relatively cautious earnings valuation despite interest from high profile investors.

Taken together, this P/E analysis suggests Netflix stock may be undervalued on an earnings multiple basis.

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

Simply Wall St Narratives for Netflix aim to connect the valuation puzzle above with the specific stories that could explain Netflix's current share price. Each Narrative outlines what would need to happen to Netflix's growth, margins and earnings for the stock to be worth materially more or less than it is today. Each one links a fair value to a particular set of catalysts and risks, so you can track over time which version of Netflix's story appears to be playing out on the Community page.

Community narratives on Netflix sit far apart, even though both describe a strong business model.

Bull case: roughly fairly valued

"In the bull case, Netflix converts pricing power and ad monetisation into stronger free cash flow than the market expects..."

Bear case: roughly fairly valued

"Here is the number the sellers are staring at, and it deserves the stare..."

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 P/E multiple, although the broader set of value checks is only mixed rather than emphatically cheap. That combination suggests a reasonable margin of safety on paper, but not a slam dunk. The real swing factor now is whether Netflix can turn its content spending, ad tier and pricing power into durable cash flows that match or beat the expectations baked into those models. The key question for investors is whether the current discount reflects opportunity or fairly prices the execution and competition 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.