Analysts are increasingly bullish on Netflix (NASDAQ:NFLX) as they recognize the potential for its free cash flow (FCF) to surge to $9 billion annually. This optimistic outlook suggests that the company’s market capitalization could climb to $270 billion, a significant increase from the current $203 billion, based on a 3.33% FCF yield. This implies that NFLX stock might be valued at 33% more, reaching $626 per share.
In morning trading on Monday, November 20, NFLX stock was priced at $469.67, marking a 35.6% increase in the last month since the release of its Q3 earnings on October 18, when the stock closed at $346.19.
The third quarter saw Netflix generating nearly $1.9 billion in FCF, with a robust 22.1% FCF margin (FCF divided by Q3 sales of $8.69 billion). Analysts surveyed by Seeking Alpha anticipate sales of $33.6 billion in 2023 and $38.24 billion in 2024, indicating a substantial 13.8% sales growth in 2024. With higher sales, the FCF margin is expected to rise to at least 24%, driving free cash flow to potentially exceed $9 billion.
This optimistic projection is propelling NFLX stock higher, with the expectation that the market will eventually give Netflix a valuation at a 3.33% FCF yield, similar to multiplying FCF by 30x. For context, Microsoft currently boasts a trailing 2.1% FCF yield, having generated almost $60 billion in FCF over the last 12 months, with a market cap of $2.75 trillion.
Applying the same logic, Netflix’s market cap could surge to $270 billion ($9 billion x 30), representing a 33% increase from its current $203 billion market cap. In simpler terms, NFLX stock, currently at $469.67, could potentially rise by one-third to over $626 per share.
For existing shareholders, a strategic move to capitalize on this potential upside is too short near-term out-of-the-money (OTM) puts. This approach allows shareholders to generate income while waiting for NFLX stock to appreciate. While Netflix does not pay dividends, shorting OTM puts enables investors to earn income, with the added benefit of potential downside protection. For instance, shorting the $450 puts with a Dec. 15 expiration offers a potential annualized expected return of 13.6%.
While there is some downside risk, given the breakeven price of $445.65, investors could find this strategy appealing, especially considering the potential for NFLX stock to reach $626 per share in the near future. In conclusion, Netflix’s substantial FCF positions its stock for considerable growth, and shareholders can leverage this by strategically selling short near-term OTM puts for additional income.
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