Can Netflix Reach 70 Million Subscribers with Streaming?

Based on our analysis, Netflix’s (NASDAQ:NFLX) subscriber base would have to exceed more than 70 million by the end of the Trefis forecast period to justify the current market price of $176.  As evident from the earnings, Netflix continues to see subscriber growth acceleration and the reported subscriber count surpassed our expectations.

We have updated our long-term forecast for Netflix subscribers as well as for other forecasts that reflect greater use of Netflix’s streaming service.  Despite increasing our price estimate by $18 from $88 to $106, our estimate is still 40% below the current market price of $176.  Netflix’s stock has more than tripled from $50 in October of last year.

Higher Subscriber Expectations

We now expect Netflix to have more than 19 million subscribers by the end of 2010, representing about 6% of the US population or 17% of the estimated 116 million US TV households (in reality this percentage includes some Canadian subscribers as well).  The higher 2010 subscriber estimate also implies that Netflix is not far from surpassing Comcast (NASDAQ:CMCSA) subscriber base of 23 million cable subscribers.  This would make Netflix the US leader in “pay TV”, ahead of players like Dish (NASDAQ:DISH), DirecTV (NASDAQ:DTV) and Time Warner Cable (NYSE:TWC).

Our revised long-term outlook is that Netflix’s subscriber base will grow to exceed more than 40 million subscribers by the end of our forecast period, and that this subscriber base will include US as well as international subscribers.  Based on our analysis, Netflix’s subscriber base would have to exceed more than 70 million by the end of the forecast period to justify the current market price of $176.  This would be equivalent to 35% penetration of US TV households if all of these subscribers were in the US.

Streaming Crucial for Long-Term Growth

Significant growth beyond the US will depend on adoption of Netflix’s streaming service.  Netflix’s management has stated that for most of its subscribers, streaming minutes are now exceeding DVD minutes when it comes to viewing the content. This is good news in the sense that Netflix’s continued investment in online streaming content is paying off. We now expect DVDs mailed per subscriber to decline at a faster rate and reach a figure of just under 2 per subscriber per month by end of our forecast period.

Simultaneously, we have increased our forecasts for videos streamed per subscriber per month to reach a figure of about 8 per subscriber per month by end of our forecast period. This represents about 4 billion annual movie sized video streams to Netflix’s subscriber base in 2016 alone.

Streaming Bandwidth is Cheaper Than Postage and Packaging

Consequently bandwidth costs will increase but postage and packaging costs are expected to decline from 2013 onwards as a result of decline in overall DVD shipments expected subsequent to that year. Since bandwidth costs tend to be lower compared to postage costs, Netflix will save cash overall which it can invest in the acquisition of content. With this logic, and in light of recent deal with Epix ($1 billion cost over 5 years), we expect Netflix’s content acquisition costs to increase in future.

Overall, the benefits for Netflix of greater streaming use can be tremendous if greater subscriber growth (in the US and outside) materializes and the company can transition away from the higher cost DVD-by-mail business.   What do you think?  Can Netflix surpass 70 million subscribers?

You can see the complete $106 Trefis price estimate for Netflix’s stock here.