For these tech giants who are changing industries, getting double-digit growth, and reinvesting all their profits to pursue long-term development, it is not easy to measure their true value.
When the market is generally in a mood to avoid risks, such companies will often reduce the price of their products to very low prices. If they care about short-term profits, they will never do so.
We can hardly measure companies like Netflix and Amazon with short-term earnings or free cash flow (FCF).
As of the close of March 6, Netflix and Amazon's stock prices have increased by 379% and 304% respectively over the past three years. Their market value reached US$141 billion and US$704 billion respectively. In comparison, the share prices of Alphabet, Facebook, Microsoft, and Apple increased by 96%, 128%, 113%, and 38% during the same period. At the same time, the Nasdaq Stock Index increased by 49%.
Of course, companies such as Reed Hastings and Jeff Bezos did a lot of things these years, which proved the rationality of their share price growth. Thanks to the expansion of internationalization, the number of streaming media users at Netflix has almost doubled to an increase of US$118 million. The company also successfully carried out product and service price increases. Amazon’s revenue more than doubled, thanks to the significant growth of its e-commerce, seller services, and AWS cloud services.
This success has led investors to begin to rethink how they really think about the long-term value of Netflix and Amazon’s core business. For example, how does Netflix subscribe to the unmatched size of streaming media services, and how does it provide unmatched content budgets for exactly how to protect its massive subscriber growth and superior pricing power as well as regional and small? The unique ability of public content investment returns. Amazon's e-commerce size ——not only refers to the number of users and product sales, but also refers to the third-party sellers and their warehouse/logistics infrastructure—and the unique Prime member service. The retail share continues to grow and expand into physical stores.
By the end of 2017, the value of Netflix with 118 million streaming users was an average of $1,200 per user, based on its $145 billion in corporate value (market capitalization plus net debt). Some analysts predict that by 2020, its number of users will reach 190 million. Based on this number, Netflix's value is $760 per user. If you think that such estimates are conservative, the number of users of the company by 2020 should reach 210 million, and based on your calculation, its value will drop to approximately $660 per user.
Now, assuming Netflix can generate 20% FCF margins based on 210 million users, and it also charges them $14 per month, then it will be able to generate more than $7 billion in cash in 2020 flow. Netflix now needs 20 times more cash than this cash flow. This could not be achieved within a few years, even if the company’s way of spending money began to become more conservative.
Similarly, if Amazon expects $379 billion in revenue in 2021, it will have an 8% FCF margin —— this is twice the profitability of Wal-Mart, but considering the reliability of Amazon's service revenue sources, this It is possible to achieve —— then it will generate approximately $32 billion in cash flow in 2021. Amazon now needs 23 times more cash than this cash flow level, which requires it to significantly slow down its spending.
These are of course approximate estimates. However, they can make an interesting contrast with companies like Facebook. Facebook’s revenue growth is very strong. Its revenue this year is expected to increase by 36%. However, its profits are also high.
Although some large capital investments may squash profits, Mark Zuckerberg's company's cash needs are only 17 times its 2020 forecast earnings per share of $10.49.
The reality is that you may measure Facebook with traditional revenue and cash flow indicators, but you cannot measure Netflix or Amazon's value in the same way. Facebook’s high short-term earnings and cash flow provide investors with a good measure of how much they can predict the company’s profitability in the coming years and measure its value accordingly.
Since Netflix and Amazon do not have such standards, optimistic prospects are bound to limit their future development.