Netflix (NFLX)

By both methods, the value today (DCF $105 · Multiples $120) exceeds the market price ($71).

Today — with margin of safety: at $71 trades ~40.9% below its value discounted to today (~$120) — the wide discount we require (≥38%, equivalent to a ~15% annual return); the risk is covered by the margin, not the rate.

At 5 years — Muy infravalorado: the target price ($149) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years comfortably exceeds the risk-free rate (4.5%) — and the discount reaches the required margin of safety.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($71) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (3.9%/year) than we project (13.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$14 bn of owner earnings in year 5 (vs ~$21.3 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on FCF maintenance (owner-FCF). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Netflix is valued on a single multiple over its owner earnings (EV/owner-FCF); a sum of the parts does not apply because it is an integrated business. Rolling grid re-based to the Q2 2026 10-Q (17-Jul): the base year is the real TTM to Jun-2026 (revenue $48.4bn, +16.0% versus the prior TTM, XBRL). The base-year cash margin (~24.7% of OCF) is already the real TTM — the earlier normalization (24.5%, not extrapolating the 27% peak) was confirmed by the figure: the flow inflects as content spend flattens against amortization. The start of the path (+14.5%) re-clocks the earlier +15%: the window runs three months along a decelerating curve (Q1'26 +16.2%, Q2'26 +13.4%, TTM +16.0%). Maintenance flow matches owner earnings: content spend already equals amortization and stock-based compensation is just 0.8% of revenue. Cash barely accumulates because the surplus is returned almost entirely in buybacks ($9.9bn TTM, with $4.7bn in Q2 alone — the retained fraction of FCF falls to ~11%), modeled explicitly: the share count declines ~2%/year — exactly the net reduction revealed by XBRL (4,349M → 4,261M diluted year over year) — and value per share is divided by future shares. The multiple compresses sharply over five years if the business compounds. The item to watch remains capital-allocation discipline after the attempted acquisition of Warner Bros.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $149 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $71, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $149 in 5 years and a required return of 4.5% annually, the maximum to pay today is $120. Against the current market price ($71), the margin of safety is 40.9% (trades below the maximum → there is margin) and the total return at that price would be 16.1% annually.

• Multiple vs. quality. 21× EV/EBIT and ~27× owner-FCF: a premium but reasonable multiple for a compounder of this quality after falling ~40%.
• The entry multiple compresses on its own. With the price fixed and the metric growing, EV/EBIT goes from 21× to 10× in five years.
• Margin of safety. Comfortably beats the 10% average return but not the 15% bar of a great investment (+5% versus the maximum price for that return); not a bargain, a fair price.
• Sensitivity to the terminal multiple. The verdict depends on the terminal multiple holding at ~24x; a re-rate to traditional media (bear case) sinks it.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (100%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Strong, predictable cash generation. FCF ~$12bn TTM, clean: content spend already matches amortization and SBC is 0.8% → FCF ≈ NOPAT.
• Sustainably high ROIC. ROIC ~35% and rising as the margin expands; returns well above the cost of capital.
• Creates economic value (EVA). CFROIC well above the 10% bar (the market's opportunity cost) → strong value creation per dollar invested.
• Cash conversion. Content is self-funded (spend ≈ amortization); FCF is no longer depressed by heavy net investment.
• Distortions to watch. Net income is noisy (non-operating item in Q1'26) → use operating income / FCF, not the headline P/E.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Netflix stopped reporting quarterly memberships (2025); growth is read by region and by price/advertising. All four regions grow in dollars — APAC the fastest (+21%), EMEA (+17%), UCAN the largest (+15%), LATAM (+11%) — driven by price increases, the ad-supported plan, and paid-sharing monetization.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real growth, not nominal. +16% in USD, spread across regions; not dependent on FX or an easy comp.
• Where the engine comes from. Well diversified: UCAN +15% (the largest), EMEA +17%, APAC +21%, LATAM +11%. No single region drives it.
• Driven by price and new levers. Price increases, the ad-supported plan, and paid sharing — not just new subscribers (no longer reported).
• Realistic deceleration. The base case projects a decline from ~16% to ~10% over 5 years — decelerating from the historical trend, without extrapolating the headline.
• Saturation / competition. Subscriber growth runs out in mature markets; the weight shifts to price/advertising. To watch.

• Relevant in 10 years / recurrence. Streaming entertainment is a recurring habit; Netflix is the global leader and the only one profitable at scale. Yes.
• Differentiated product. Exclusive catalog and originals plus recommendation; differentiated, though content competes for attention with YouTube and social media.
• Pricing power. Real: raises prices with low churn (brand + catalog). The ad-supported plan widens the price range.
• Operating leverage. Very high: operating margin from 18% to ~30% in three years; revenue grows faster than content spend.
• Behavior in a recession. Defensive (cheap entertainment per household), though not immune to churn and the cyclical ad spending of the new ad tier.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.4x
• ✓Interest coverage (EBIT / interest)22.1x
• !Liquidity (current ratio)1.17×
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 100% of ROIC
• ✓Value creation (ROIC − 10% bar)+25pp
• !Malinvestment test (capex vs incremental ROIC)Strong investment mode 2.3x
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 0.8% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Manageable debt. Gross debt ~$13.4bn against cash ~$12.3bn → net debt ~$1bn; FCF (~$12bn) covers it comfortably.
• Liquidity. Current assets $17.1bn vs current liabilities $12.1bn (ratio ~1.4); no short-term issues.
• Self-funded content. Content spend no longer strongly exceeds amortization → no cash drain from heavy net investment.
• Balance-sheet risk from M&A. A leveraged mega-acquisition (Warner Bros. would have cost ~$83bn) would flip this solid profile — the structural shadow.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Top-tier operators. Co-CEOs Sarandos and Peters plus founder Hastings as chairman; long-term execution and focus.
• Governance (single class). One vote per share, no dual-class — shareholders have proportional voice.
• Capital return. Aggressive buybacks (~$9.1bn in 2025) at depressed prices → compound per-share value.
• M&A appetite (the shadow). The ~$83bn Warner Bros. bid raised questions about asset-light discipline; they withdrew after being outbid, but the risk remains latent.

• The ~$83bn bid for Warner Bros. (Dec-2025) unsettled a market that values Netflix's asset-light, disciplined model; the stock fell on fear it would leverage the balance sheet and integrate a declining linear-TV business.
• Even after withdrawing from Warner Bros. (Feb-2026, outbid by Paramount Skydance), fear of another mega-acquisition of traditional media assets (NBCUniversal/Versant) persists — a discount for capital-allocation risk, not the business.
• The 21× EV/EBIT multiple looks expensive at first glance for growth decelerating from 16% to ~10%; part of the market reads it as 'expensive even after the drop.'
• Net income is noisy (Q1'26 jumped on a non-operating item), which muddies the headline P/E.

The discount reflects strategy and capital-allocation risk (M&A appetite), not business deterioration: revenue grows +16%, the operating margin expands to ~30%, and FCF compounds. The gap between fear of an acquisition that may not happen and a business that keeps compounding is the source of the opportunity — conditional on capital discipline holding.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -1%/year (-4% total): the margin of safety protects the downside. The bull (+24%/year, +192% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Capital allocation / M&A. Appetite for a mega-acquisition of traditional media assets (Warner Bros., and the specter of NBCUniversal/Versant) is the central risk that compressed the stock's multiple.
• Saturation and competition. Subscribers running out in mature markets plus competition (Disney+, Amazon, YouTube, sports) pressuring growth and price.
• Content cost. Re-acceleration of spend (live sports, big tentpole productions, talent) faster than revenue would reverse operating leverage.
• Demanding multiple. 21× EV/EBIT for decelerating growth: without a wide margin of safety, a disappointment hits the multiple.
• Noisy net income. Non-operating item in Q1'26 inflates TTM net income → the headline P/E is misleading.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 35% above the 10% bar, with a +41% margin → a quality business at a good price.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 13% at a multiple/growth of 2.0 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 35% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 4% vs our 13%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -1%/yr, bull-scenario ceiling +24%/yr over 5y and a +41% margin → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: efficient scale, intangibles, cost advantage, network effects, switching costs → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 4%, within what we project (13%) — the story squares with the numbers.