Netflix

With Netflix's recent run-up I decided to take a look at it using the rules from, Warren Buffett Way.

Other posts I have done in this manner are:

• Netflix in June of last year, with incorrect valuation numbers
• Best Buy
• Western Union

Business

Simple, and Understandable

They have an inventory of a crapload of movies and they rent them out to people on monthly plans.

Using this model they don't have to pay huge capital expenditures to grow - by building brick-and-mortar stores - just to acquire subscribers.

Consistent History

Very consistent, even though they were attacked by Blockbuster twice they still have managed to grow subscribers.

With Blockbuster paying more attention to their margins and less to spending non-stop to create growth, Netflix should be able to return to its more consistent past.

Favorable Long-Term Prospects

Very. Netflix is on the cutting edge of Internet VOD.

They currently have more than 8,000 movies available to watch on demand. This feature is limitless and well worth the price of subscribing - especially for young people like me who may be in college and using their computer constantly.

Any battle over video formatting also benefits Netflix, because it ads more time to the disc rental market.

Netflix was the first-mover in Online DVD rental, and is currently the best at VOD, I wouldn't be surprised if they start a straight to the TV type rental service soon, even if they don't soon it will still bring huge growth.

Management

Rational

I really like Netflix management. They've showed their ability by destroying Wal-Mart and Amazon's attempt and by fighting off Blockbuster.

I also like their shrewdness in not entering the economically unsound video game rental business.

Candid

They did well on their Conference Call, and I liked how they talked about each different competitor and how they have reacted.

Resists the Institutional Imperative

Their press release always read " Netflix release xquarter results," and they did not seemed focused on the short term in the Conference Call.

Financials

Return on Equity

ROE is currently 16%, pretty good, but I expect it to increase in the future.

Owner's Earnings

Income                  $66,952.00
+ D&A                  $224,962.00
- CapEx            $223,436.00
= Owner's Earnings      $68,478.00 

Profit Margins

Netflix has about a 9% margin which is constricted from Blockbuster, it should raise in the future.

Valuation

DCF

Using Owner's Earnings, a 10% discount rate, growth starting at 18% next year than falling from there and then adding excess capital I get a value of $28 per share.

Conclusion

Netflix looks overvalued right now, but I remain confident in their abilities. I will consider selling part or all of my position and hoping to buy again soon if someone else comes into the picture and Wall St. pushes the price down again.

However, I will not sell until I find a better company than Netflix in which to invest my money.