NFLX

We rate NETFLIX INC (NFLX) as a Reduce with a composite score of 47.5/100 at a current price of $78.72. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in quality (83th percentile) and value (72th percentile), which together account for the majority of the composite score. Offsetting weakness in momentum (0th percentile) and investment (26th percentile) tempers our overall conviction. We assign a Wide Moat rating (72/100), High uncertainty, and Standard capital allocation.

Key items to watch: momentum to confirm whether the current price trend has legs; balance sheet deleveraging progress; sustainability of the current growth rate. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

NETFLIX INC holds a top-quartile position (#0 of 50) within the Services sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 47.5/100 places it at rank #2412 in our full 7,333-stock universe. As a mega-cap company with a $397.3B market capitalization, NETFLIX INC benefits from significant scale, distribution networks, and brand recognition that smaller competitors cannot easily replicate.

Revenue is growing at 20%, though momentum at the 0th percentile suggests the market has not yet fully recognized this trajectory. This potential disconnect between fundamental improvement and market recognition could represent an opportunity for patient investors if the growth trend persists.

The margin cascade tells an important story: gross margins of 49% (-10.5pp vs sector) narrow to operating margins of 31% (+27.4pp vs sector) and net margins of 25.5%, yielding a gross-to-net conversion rate of 52%. This efficient conversion suggests well-controlled operating costs and limited margin leakage between the gross and net levels.

At a current price of $78.72, NETFLIX INC appears undervalued relative to its fundamentals. Our value factor score of 72/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. The stock screens as attractively priced on a majority of these measures, suggesting the market may be underappreciating the underlying fundamentals.

The stock currently trades at a P/E of 30.4x (a 28% premium to the sector median of 23.7x), EV/EBITDA of 25.0x (at a premium), P/B of 12.5x, P/S of 7.7x. The above-sector P/E multiple suggests the market is pricing in superior growth or quality, which our analysis partially supports given strong quality metrics.

We assign a High uncertainty rating to NETFLIX INC. Key risk factors include significant leverage (109% debt-to-equity), below-average price stability (39th percentile). The wide range of potential outcomes widens our fair value estimate and increases the possibility of permanent capital impairment. Investors considering this name should size positions accordingly and demand a meaningful margin of safety before initiating.

Specific risk factors that inform our assessment include: significant leverage (109% debt-to-equity); below-average price stability (39th percentile). Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 39th percentile and quality factor at the 83th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: healthy gross margins of 49% provide a buffer against cost pressures; large-cap scale ($397.3B) provides resilience. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile warrants caution and disciplined position management.

We rate NETFLIX INC's capital allocation as Standard. Management has shown adequate — though not exceptional — stewardship of shareholder capital. Returns on equity stand at 41.0%, and the balance sheet is managed within acceptable parameters (D/E: 109%). Exemplary allocators typically sustain ROE above 20% and D/E below 50%; NETFLIX INC falls short on at least one dimension.

There is room for improvement in optimizing the capital structure or enhancing shareholder returns. Absent a dividend, the overall capital allocation framework would benefit from either higher reinvestment returns, improved balance sheet efficiency, or increased shareholder distributions. We will monitor for signs of strategic improvement that could warrant an upgrade.

In summary, NETFLIX INC receives a Reduce rating with a composite score of 47.5/100 (rank #2412 of 7,333). Our quantitative framework assigns a Wide Moat (72/100, trend: stable), High uncertainty, and Standard capital allocation. The average factor score across quality, value, momentum, stability, and investment is 44/100.

Our analysis does not support a constructive view on NETFLIX INC at this time. The combination of the current quantitative profile, high uncertainty, and standard capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.