Investment Portfolio Management
The company was established in 1997 and its main activity is to provide is a global coverage for streaming movies and TV series. The total subscribers to the services are 75 million people spread over 190 countries. It is the world leading on the side of linear TV networks covering most of the entertainment movies and series. They offer their programming though this is done on-demand via the applications which run on both phones and the smart TVs.
Historical price method
Using the analyst consensus method to predict Netflix stock price 12 months from today we will rely heavily on the methodology. The parameters that will guide our decision is based on the methodology that will guide the analyst. The procedure is a recommendation between 1 and 5 where 1 is a strong sell and 5 is a strong buy. The formula for the calculation is provided by the following calculation.
PSpot + (X – 2.5)*(PMAX - PMIN)/5
The results of the calculation in this scenario can be obtained and displayed the below scenario analysis.
P-Spot : 95.49
Average Recommendation: 3.87
P-Max : 130.93
P-Min : 59.017
Projected Price: $115.2
Using the information that is derived for the calculation of the model above we develop the following model that will help us determine our decision.
Both the prediction and the spot price 12 months from today are match
The probability that the prediction is within the right price range given the spot price is correct price. .
The probability that the spot price gives a correct price given the prediction is within the price range.
Neither gives the correct price but the spot price and the predictive price gives the same price.
Both the spot price and the predictive price are correct given they are determine by guess.
The current price in the market 12 months later after conducting the analyst consensus is 116.5. Based on the model and the methodology of determining the results of study we can conclude that stock of Netflix is a strong sell but not a strong buy. The model is purely based on prediction from the historical price range.
Sector and the US Economic overview Method
CAPM model is used to make the prediction in this case the main parameter for the study as outlined. From the economy outlook we will use predictor RM = next year stock market return; and Rf = risk free return. The formula for the predictive CAPM model is outlined below.
Rj = Rf + Bj *[ RM - Rf]
The independent variable in this equation and the dependent variable in the equation are outlined below.
Rf : 1.959%
Beta : 1.482
Rm : 9.737%
Rj : 13.48%
With this outcome we have outlined we need to determine the predictive market price for the stock. The predictive price will be our execution price of the spot price which will determine if it’s a buy or a sell. The parameter used in this particular question is
Pj = P0 *(1+ Rj)
The parameter P0 is the current market price that helps us determine the price of the stock in the future. The value for that particular price is outlined as 95.93 which reflect the market current price. The projected value in the market is said to be:
Projected Price: $108.87
The accuracy of the model in the predictive capacity of prices 12 months later is very accurate. The model uses the United States economic indicators to predict the price of a stock in the future. The economic indicator such as monetary policies, GDP and the inflation rate affect the volatility of the market. Generally the economic condition of the firm is a function of the predictive capacity of CAPM model both from the sector view and from the whole economic view. However, in this particular scenario the CAPM is almost accurate in predicting the prices. The current spot price is $110.5 compared to $ 108.87 which is the predicted price of the stock. In conclusion, the model when used indicates that it is a strong buy for an investor.
Ratio valuation
The ration valuation multiplies the future earnings per share EPS to the P/E ratios based on average company ratio of the industry subsector. Suppose the following as the future EPS and P/E for the stock.
P/E : 307.64
EPS : 0.38
Our ratio valuation model helps us to determine then the 1-year forward projected price for the stock. The 12 months prediction of the price is identified as:
Projected Price: $116.90
The predictive capacity of the model can be identified as slightly accurate based our current spot price against our predicted price. The condition is considering a strong sell for the investors based on the future predictive capacity.
DDM – discounted dividend model
The company police is that they don’t give out divided to investors; therefore, the model does not have any predictive capacity in this scenario. This condition provides an opportunity to conduct the free cash flow to equity model. The formula for the DDM can be used when we have obtained the FCFE1 of a stock such as the Netflix. The formula for the DDM is obtained as below:
Pj1 = Pj0 x (1 + r)
Where:
R: The cost of capital
One year prediction is found by multiply Pj0 by (1 + r):
FCFE Model – free cash flow to equity model
Method is used when the stocks do not pay dividends to their investors. The free cash flow to equity model is established using the formula:
Pj0 = FCFE1/(1+r) + FCFE2/(1+r)2++ FCFE10/(1+r)10 + P10/(1+r)10
The formula is combination of the DDM model with the FCFE model to make the one year predictive price of the stock. The future cash flows to equity model utilizes part future value and the cash outlay to determine the one year predictive price of the stock. FCFE is the cash flow per share that is available to pay out as a dividend if the company wanted to do so. The five years FCFE for Netflix are:
2011 : $268M
2012 : $274.7M
2013 : 281.57M
2014 : 288.6M
2015 : 295.82M
The one year prediction of the model is identified as
Projected price: $110
The predictive values identified by the model are strong buy because of the value that is depicted by the projected price. The use of the future vale and the firm equity is not an accurate price predictor given the number of years involved.
Sensitivity analysis
The overall view of the four models is as show below. The average value calculation of the four model can be used however to smoothen the variation about the mean. The four model average indicates that they are sensitive about their mean.
Analyst Consensus: $115.2
CAPM : $108.87
Ratio Valuation: $116.90
FCFE : $110.6
The sensitivity analysis indicates that the predictive capacities of the four models are tied to the expected return in the market. The close connection indicates that all the models are accurate in predicting the one year value of the stock. The targeted value in this research study shows that each of the models apart from predicting the final value has the stock. All the models have a high correlation to each other hence the positive results obtained from the sensitivity analysis. The average overall price of the model of the model is
Average Overall Price : $112.82
Conclusion and summary
Most often the decision to take a long or a short position on a stock is determine by the current price and the anticipation of better future value. The current price compared to the future price in the market is the main determinant. The market volatility also influences the decision depending on the risk appetite of the investor. The statistics indicates that the company is undervalued and the recommendation is to purchase Netflix stocks. The reason is that the risk is sustainable and the stock has the capacity to improve in terms of the price. The stock is also purchased at an undervalued price.
Current Price : $95.94 (March 7)
Target Price : 116.5
Beta : 1.48
Under Valued
Recommendation : Buy
