Possible Netflix Downside from Growing Content and Technology Costs
Netflix (NASDAQ:NFLX) competes with pay-TV providers like Comcast (NASDAQ:CMCSA), Dish Network (NASDAQ:DISH), DirecTV (NASDAQ:DTV) and Time Warner Cable (NYSE:TWC) to acquire the newest film and TV content for its subscribers. Trefis members have created forecasts for two key drivers of Netflix’s (NASDAQ:NFLX) stock over the last week: (1) Content Acquisition Cost (As % of Revenues) and (2) Technology & Development Costs (As % of Gross Profits).
Estimates by Trefis members suggest a downside of nearly 30% to our estimate for Netflix based on higher costs (as a % of Netflix’s Gross Profits). We currently have a Trefis price estimate of $85 for Netflix’s stock, about 17% below the current market price of $103.
Netflix’s stock is quite sensitive to (1) Content Acquisition Cost (As % of Revenues) and (2) Technology & Development Costs (As % of Gross Profits). Below are charts showing recent estimates created by Trefis members for the two drivers in detail.
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1. Content Acquisition Cost (As % of Revenues)
The average of forecasts for Content Acquisition Cost (As % of Revenues) created by Trefis members indicated a projected increase from 15% in 2010 to 15.5% by the end of the Trefis forecast period, compared to the baseline Trefis estimate of costs remaining at 13.6% of Netflix Gross Profits over the Trefis forecast period. The member estimates imply a downside of 12% to the Trefis price estimate for Netflix’s stock. In the past, Content Acquisition Cost (As % of Revenues) has increased from 13.9% in 2006 to 14.6% in 2009.
You can drag the forecast trend-line above to express your own view, and see the sensitivity of Netflix’s stock to Content Acquisition Cost (As % of Revenues).
Our complete analysis for Content Acquisition Cost (As % of Revenues) is here.
2. Technology & Development Costs (As % of Gross Profits)
The average of forecasts for Technology & Development Costs (As % of Gross Profits) created by Trefis members indicated a projected increase from 18.4% in 2010 to 18.7% by the end of the Trefis forecast period, compared to the baseline Trefis estimate of costs remaining at 13.2% of Netflix Gross Profits over the Trefis forecast period. The member estimates imply a downside of 15% to the Trefis price estimate for Netflix’s stock. In the past, Technology & Development Costs (As % of Gross Profits) has increased from 5.3% in 2004 to 12.9% in 2009.
You can drag the forecast trend-line above to express your own view, and see the sensitivity of Netflix’s stock to Technology & Development Costs (As % of Gross Profits).