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Netflix In (NFLX) stock has come off its highs to $474.06 as of Friday, Jan. 5, 2024. However, NFLX stock could still be worth at least 35% to $640 per share based on its powerful free cash flow.
This is based on using a 22% FCF margin and a 3% FCF yield metric. As a result, Netflix could rise from its present $207.5 billion market value to $280 billion, or roughly $640 per share.
Moreover, shareholders in NFLX stock can get paid to wait for this to happen. That can be done by selling short (OTM) put options in out-of-the-money (OTM) strike prices in near-term expiry periods.
I discussed these ideas recently in my Dec. 12 Barchart article, “Netflix Stock Is In a Trading Range - Good for Income Plays Like Shorting OTM Puts.” The trades I recommended then worked out well. This article will show how shareholders in NFLX stock can repeat this income play.
But first, let's review why NFLX stock could be worth considerably more.
Free Cash Flow Will Power NFLX Stock Higher
Last quarter Netflix generated $1.888 billion in free cash flow (FCF) on $8.542 billion in revenue. Moreover, management projected it would make $6.5 billion in FCF in 2023.
Based on analysts' sales projections of $33.63 billion in 2023, that means the FCF margin will be almost 20% at 19.3%. The Q3 FCF margin was higher at 22.1%.
So, using analysts' 2024 revenue forecasts of $38.26 billion in revenue and using a 22% FCF margin, FCF could rise to $8.42 billion for the whole year. We can use that to estimate Netflix's value.
For example, using a 3.0% FCF yield metric, we estimate Netflix's market cap could rise from $207.5 billion market value to $280 billion. That is seen by dividing the 2024 FCF estimate of $8.42 billion by 3.0%. This is also the same as multiplying it by 33.33x (i.e., $8.42b x 33.333 = $280.7 billion).
In other words, if we divide $280.6b by the existing market cap of $207.5 billion, Netflix's market cap will rise by 35%. That means that NFLX stock could rise from $474 to $640 per share.
Short OTM Puts for Income
Existing shareholders can make income by selling short OTM puts in near-term expiry periods. For example, in my last article on Dec. 12, I recommended shorting puts for the Dec. 29 expiration period, just 3 weeks away.
The $440 strike price puts, over 4% out-of-the-money, traded for a premium of $2.47 per contract. That gave the investor an immediate 0.56% yield (i.e., $2.47/$440).
As it turned out, NFLX closed well above the $440 strike price at $486.88 on Dec. 29. So this was a successful short and the investor kept the yield and had no obligation to buy the stock at the $440 strike price.
This pay can now be repeated. For example, the Jan. 26 expiration puts at the $440 strike price are now trading for $8.25, considerably more than before. In fact, the strike price is over 7.0% out-of-the-money and the investor can make an immediate 1.875% yield (i.e., $8.25 / $440.00).
This implies that investors are worried that the stock could fall further in the near term. However, if the company produces good earnings, which are projected to come out on Jan. 23, the stock could stay flat or move higher. Even if it doesn't, the high premium level means that the breakeven price is $431.75 (i.e., $440-$8.25), which is 8.9% out-of-the-money. That means that NFLX would have to fall almost 9.0% before the short-put investor loses money on an unrealized basis.
Moreover, more enterprising investors could short the $450 strike price and immediately receive $11.10 per contract. That strike price is over 5% below today's price and the immediate yield is 9.8% (i.e., $11.10/$450.00). And the breakeven price of $438.90 is still 7.4% below the spot price.
The bottom line is that investors in NFLX stock can expect to see Netflix worth considerably more over the coming year. Shorting OTM puts is an ideal way to take advantage of investor's fears.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
