Netflix CEO confirms shift from DVD to streaming video; stock could be at $70 (+50% upside)
In a previous note, we had discussed the significant cost savings that Netflix could realize if its primary mode of film delivery shifted from mailing to DVDs to delivering streaming video resulting in a valuation of about $70 per share. We believe this shift is underway as the company’s subscriber base transitions towards lower end subscription plans (fewer DVDs per month) while increasing their consumption of streamed videos. Recent comments by Netflix CEO Reed Hastings seem to confirm both these trends although Hastings doesn’t explicitly state that they are related.
Hastings mentioned that subscribers increasingly prefer the two lowest priced packages – the $8.99 per month plan (1 DVD at a time) and $13.99 per month plan (2 DVDs at a time). We have already factored in a decline in our average subscriber plan pricing forecast (currently around $13.5 per month) to reflect this trend.
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Surprisingly, Hastings also said that DVDs will remain the ‘primary delivery format’ for the next two years suggesting that streaming video will outpace DVD delivery sooner than many might expect.
We estimate that the Number of DVDs Mailed per Netflix Subscriber is 7 per month whereas the average Number of Videos Streamed per Subscriber is less than 1 per month. Within Netflix’s content on our site, here, you can see how the stock will be impacted if these two figures are reversed, and the number of DVDs mailed per subscriber goes to 1 per month.