Netflix is demonstrating robust financial health, highlighted by a strong third-quarter free cash flow (FCF) margin of over 23%. Despite a recent dip in its stock price, this underlying performance suggests the company's shares may be undervalued, with analysis pointing toward a potential upside of more than 23%.
The streaming giant’s ability to consistently convert revenue into cash is a key indicator of its operational efficiency and long-term stability. This financial strength is now at the center of valuation discussions, suggesting a target price of around $1,374 per share based on conservative forecasting models.
Key Takeaways
- Netflix reported a third-quarter free cash flow margin of 23.11%, maintaining a year-to-date average of approximately 23%.
- Based on projected 2026 revenues and a conservative valuation model, analysis suggests Netflix stock could be worth $1,374 per share, a 23.4% increase from its recent price of $1,113.59.
- Analysts have revised 2026 revenue forecasts upward to $50.91 billion, a 13% increase over 2025 estimates.
- The company's projected 2026 free cash flow is estimated to be $11.71 billion, indicating accelerating cash generation.
Unpacking Netflix's Financial Performance
While stock prices can fluctuate based on daily market sentiment, a company's ability to generate cash remains a fundamental measure of its health. In its third-quarter results released on October 21, Netflix showcased impressive efficiency in this area.
The company achieved a free cash flow margin of 23.11%. This means that for every dollar of revenue, more than 23 cents was converted into free cash flow—money left over after covering operational expenses and capital expenditures. This performance is not an anomaly; it follows a 20.46% margin in the second quarter and a 25.24% margin in the first, bringing the year-to-date average to a solid 22.9%.
What is Free Cash Flow?
Free cash flow (FCF) is the cash a company produces through its operations, less the cost of expenditures on assets. It is a critical indicator because it shows how much cash is available to pay dividends, reduce debt, or reinvest in the business. Strong and consistent FCF is often seen as a sign of a healthy, well-managed company.
This consistent performance provides a strong foundation for forecasting the company's future financial trajectory. Investors often look beyond short-term stock movements to these core metrics to gauge a company's true value.
Forecasting Future Value
The positive financial results have led analysts to adjust their expectations for Netflix's future earnings. Revenue forecasts for 2026 have been revised upward to $50.91 billion, which represents a significant 13% increase over the $45.07 billion projected for 2025.
Using the established 23% FCF margin, it's possible to project the company's cash-generating potential for 2026. Applying this margin to the updated revenue forecast results in an estimated free cash flow of $11.71 billion for that year.
Accelerating Cash Generation
The projected $11.71 billion in FCF for 2026 is nearly $1.1 billion higher than an estimate based on the current run-rate of Q3's FCF. This suggests that Netflix's ability to generate cash is not just stable, but actively accelerating.
This projected growth in free cash flow is a central component in determining a fair market value for the company. By using a conservative valuation method, a new price target for Netflix stock emerges.
A Conservative Path to a Higher Valuation
To determine if a stock is undervalued, analysts often use a free cash flow yield metric. This compares the company's FCF per share to its market price. A conservative FCF yield of 2.0% is being applied in this analysis, which is equivalent to valuing the company at 50 times its free cash flow.
Applying this multiple to the projected 2026 FCF of $11.71 billion results in a target market capitalization of $585.5 billion for Netflix. Compared to its recent market cap of approximately $474.4 billion, this represents a potential upside of 23.4%.
"This valuation model suggests a target price of $1,374 per share, a notable increase from its recent closing price of $1,113.59 on October 23."
This figure aligns closely with the consensus among market analysts. A survey of 47 analysts reveals an average price target of $1,341.62, reinforcing the view that the stock currently has room to grow.
Investment Strategies to Consider
For investors who see potential in Netflix's valuation, there are various strategies to consider. One approach for those willing to take on a specific risk profile is selling out-of-the-money (OTM) put options.
This strategy allows an investor to collect a premium upfront while agreeing to buy the stock at a lower price (the strike price) if it falls below that level by the option's expiration date.
Example of an OTM Put Strategy
- Option Chain: For the November 28 expiration, the $1,065 strike price put option carries a premium of around $18.63 per share.
- Immediate Yield: Selling this put generates an immediate yield of about 1.75% for a one-month period.
- Downside Protection: If the stock price does fall and the option is exercised, the effective purchase price for the investor would be $1,046.35 ($1,065 strike price minus the $18.63 premium collected). This breakeven point is 6% below the recent closing price, offering a buffer against a moderate decline.
This strategy can be attractive as it either generates income while waiting for the stock to appreciate or allows for purchasing the stock at a discount to its current market price. The bottom line from the financial data is clear: Netflix's strong cash flow fundamentals present a compelling case for potential value, even as its stock navigates short-term market volatility.
