Netflix (NFLX)

Netflix is the global leader in subscription streaming, with ~$47bn in revenue growing +16% and the industry's largest scale-and-content moat. The story of recent years is operating leverage: the operating margin expanded from 18% (2022) to ~30% (TTM), and free cash flow — clean, because content spend already matches amortization and SBC is only 0.8% of revenue — runs around $12 billion. It is a high-quality business: high and rising ROIC, strong cash generation, and buybacks of ~$9 billion a year (≈ −2% of shares), which compound per-share value.

Netflix is valued on a single multiple over its owner earnings, not by sum of the parts: it is an integrated business. The correct measure is after-tax operating profit / FCF (~$11bn), not net income — which in the TTM is inflated by a non-operating item from the first quarter of 2026. Having fallen ~40% from its high, at ~$82 it trades at ~22x EV/EBIT, ~31× owner-FCF — a premium multiple but no longer extreme for this quality.

Projecting a gradual deceleration in revenue (from +16% to ~+10%) and margin expansion toward ~35%, owner earnings reach ~$22 billion a year by year 5. With buybacks (~−2%/year, funded by FCF) factored in, the base case yields a value of ~$149 per share in five years, equivalent to an annual return (CAGR) of ~+13%. Buybacks (~−2%/year, funded by FCF) add little more than retaining the cash — at this multiple they are nearly value-neutral per share, though they concentrate ownership. The entry multiple compresses on its own: at today's price, EV/EBIT goes from ~24x to ~11x in five years if the business compounds.

The verdict is Undervalued. It trades at a real discount to value, though short of the required margin of safety. At ~$82, the expected annual return is around ~+13%, which reads against the method's scale: 4% covers inflation, 10% matches the average stock market return, and 15% defines a great investment (-11% versus the maximum price for a 15% return). This is a quality compounder whose price improved with the correction; buybacks concentrate ownership but, at this multiple, add little additional value per share.

The central risk is not the operation — which is compounding — but capital allocation: the appetite for a mega-acquisition of traditional media assets (Warner Bros. first, and the specter of NBCUniversal/Versant afterward) is what compressed the stock's multiple. The test is whether leadership maintains asset-light discipline; withdrawing from Warner Bros. after being outbid was a good sign. The second front is competitive: subscriber saturation in mature markets and a possible re-acceleration of content costs (live sports) that could stall margin expansion.