House Of Cards Signals New Motivations for Netflix
Netflix (NASDAQ:NFLX), which has established a strong foothold in the online streaming business, is now looking to bid for exclusive rights to original content. Currently, the arena of online movie sales and rental is dominated by services like Apple’s (NASDAQ:AAPL) iTunes, Netflix, Amazon (NASDAQ:AMZN), Hulu etc. Our price estimate for Netflix stands at $119, which is significantly below the current market price, which is above $200.
From Complementary to Disruptive
Netflix has evolved as a service that has been more or less complementary to traditional pay-TV business where Netflix has flourished is monetizing older content and offering it at minimal prices to customers. While there was skepticism around this before, it has proved to be immensely successful (at least until now) and has led to rapid subscriber gains. However Netflix is now stepping on pay-TVs toes and a larger battle appears to be brewing as Netflix has successfully acquired its first original TV series, House of Cards, by outbidding HBO. [1]
- Up 27% Year To Date, Will Q1 Results Drive Netflix Stock Higher?
- Netflix On A Roll As It Benefits From Paid Sharing And Ads. Is The Stock Undervalued At $610?
- Up 50% Over Last Year, Will Q4 Earnings Drive Netflix Stock Higher?
- Will Netflix Stock Rally 40% To Return To Pre-Inflation Shock Highs?
- How Will The Password Sharing Crackdown Help Netflix Q3 Results?
- Will Netflix Stock Return To Pre-Inflation Shock Highs Of Over $650?
Netflix Outbids HBO – Makes Sense?
Netflix has outbid other networks like HBO and AMC for House of Cards that were said to be in the race. [2] This seems strange given HBO is a premium network owned by Time Warner (NYSE:TWX) with much deeper pockets.
We estimate that HBO constitutes close to 30% to Time Warner’s stock, which we value at $35.51 for Time Warner. This is very close to the market price and implies that HBO’s is about $7.8 billion. In comparison to this, Netflix’s valuation as per our estimates stands at around $6.3 billion though the market assigns a $12 billion value.
Netflix’s bold move signals that in order to grow subscribers, it should look at original content. HBO has had success with this in the past. Simply making money off on the older content will continue to be a focus but faces competition from emerging competitors. Recently developed competition includes Amazon getting stronger and Facebook taking its first steps. Our previous article on Netflix talks about this in an article titled Facebook Stepping on Netflix’s Toes With Streaming Movies. If Netflix can successfully continue to strike such deals of original content and differentiate itself against other online competitors, it could sustain the subscriber momentum. Below you can see how change in subscribers can impact Netflix’s price estimate.
What is the Risk?
If Netflix looks for original content, it runs risk of paying too much up front and then the show turns out to be a dud and so this impacts content acquisition costs. Besides this, Netflix has committed for a minimum of 2 seasons consisting of 26 episodes even without a pilot run, which is unusual. At surface it looks like Netflix was aggressive about getting into this business, and in order for them to succeed in the longer-term, we believe they will have to repackage this somehow in order to charge a higher price for this service.
See the complete analysis of Netflix.
- Netflix Seals Deal For Original Series, The Wall Street Journal, Mar 21 2011 [↩]
- Netflix Gets Into The Original Content Game, Buys Upcoming Show For A Rumored $100m, CrunchGear, Mar 15 2011 [↩]