Netflix remains highly recessionary resistant, says Evercore ISI’s Mark Mahaney

Key Concepts

• Recessionary Resilient Stocks
• Operating Margins
• Content Spend
• Bundling
• Live Sports
• Price-to-Sales Multiple
• Free Cash Flow
• Share Buybacks
• Price-to-Earnings (P/E) Ratio
• Earnings Growth

Netflix's Recessionary Resilience

• Mark Mahaney believes Netflix is a recessionary resilient stock, supported by its performance over the past 25 years across various economic cycles.
• Netflix has demonstrated the ability to hold up during economic downturns.

Operating Margins and Content Spend

• Netflix has achieved record-high operating margins.
• Mahaney anticipates Netflix will increase content spending later in the year.
• This increased spending is expected to support the expansion of bundling options and the addition of live sports content.
• The goal is to make the service more compelling to users.

Valuation

• Mahaney considers Netflix's valuation to be reasonable, though not dramatically compelling.
• He does not primarily focus on the price-to-sales multiple.
• Netflix now generates material free cash flow and is actively buying back stock.
• The company had a record amount of share buybacks in the last quarter.
• Mahaney finds Netflix's decision to buy back stock at an all-time high to be bold, but potentially justified by the company's confidence.

Price-to-Earnings (P/E) Ratio and Earnings Growth

• Mahaney assesses Netflix on a price-to-earnings (P/E) basis.
• The stock is trading at approximately 35 times earnings, which is considered expensive and near the upper end of its trading range.
• He does not expect significant multiple expansion from the current level.
• The potential for stock appreciation is primarily driven by projected earnings growth of 25%.

Upside Potential and Risk-Reward

• Mahaney estimates a potential upside of around 10% for Netflix.
• He suggests that other stocks may offer more attractive risk-reward profiles.
• Despite this, he maintains a positive outlook on Netflix due to its recessionary resilience and earnings growth potential.

Conclusion

Mark Mahaney views Netflix as a recessionary resilient stock with reasonable valuation, driven by strong operating margins and strategic content spending. While the P/E ratio suggests limited multiple expansion, the projected 25% earnings growth offers further upside potential. The company's aggressive share buyback program reflects confidence in its future performance.