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Investment Overview for Netflix (NASDAQ:NFLX)
Below are key drivers of Netflix's value that present opportunities for upside or downside to the current Trefis price estimate for Netflix:
Netflix's U.S. Streaming Subscribers: Currently we forecast Netflix's U.S. streaming subscriber base to increase from around 39.0 million in 2014 to more than 55.0 million by end of our forecast period. There could be more than 10% downside to our price estimate if this figure were to increase to only about 45 million instead. This could happen if the market growth for streaming slows down and competition weighs heavy in the future. On the other hand there could be around 12% upside to our price estimate if Netflix blows past expectations and captures more than 50% of U.S. households by end of our forecast period, implying a subscriber base of about 65 million U.S. subscribers.
Domestic Streaming Contribution Margin: Currently we forecast this figure to rise from about 30.0% in 2014 to close to 40.5% by the end of our forecast period. However there could be a downside of about 10% to the our price estimate if the figure was to reach only 35%. On the other hand, there could be upside of about 8.5% if this figure was to increase to 44.5% instead.
For additional details, select a driver above or select a division from the interactive Trefis split for Netflix at the top of the page.
Netflix offers video rental service in the form of DVDs as well as online streaming to U.S. customers. In international markets including Canada, Latin America, U.K., Ireland and Nordic countries, the company offers only online streaming services.
Netflix's content is available for streaming through variety of devices such as PCs, Macs, video game consoles, tablets and smartphones. The company is consistently working towards striking more content deals in order to improve its online library.
In the case of DVDs, Netflix's customers can choose the videos they want to rent from an online library available on the company's website. Unlike traditional video rental businesses such as Blockbuster and Redbox, Netflix does not have any store locations and instead delivers DVDs through postal mail.
The majority of Netflix's value is currently hinged on its U.S. Streaming services for the following reasons.
Firstly, the DVD subscribers are expected to decline significantly in the U.S. while streaming subscribers are expected to grow. The home video market is growing in the U.S. and streaming is the best way to tap it given the proliferation of multiple internet-enabled devices. Netflix has seen rapid adoption of its streaming plans in the U.S. Although the competition is intensifying, Netflix remains a leader in the streaming segment.
Secondly, the international streaming business is currently a relatively lower value contributor but this is expected to change in the future as the US streaming market becomes saturated. Netflix has expanded into around 50 countries the progress has been so strong that the company now believes it can complete its global expansion over the next two years while managing to still be profitable.
There is very clear shift of video consumption to the Internet, and Netflix is one of the companies leading this change. The company's DVD subscribers are declining and future growth will come from streaming subscribers. Eventually the company would like to replace all of its physical DVDs with online library.
Netflix entered Canada towards the end of 2010 with its streaming-only service. In 2011, it witnessed good adoption in Canada and consequently expanded to Latin America. In early 2012, Netflix launched its streaming service in the U.K. and Ireland. Following that success, the company also expanded to Nordic countries of Norway, Sweden, Denmark and Finland. Netflix expanded its service to The Netherlands by late 2013 and launched in Germany, Austria, Switzerland, France, Belgium and Luxembourg by late 2014. Currently, Netflix has subscribers in around 50 countries. While the international market presents a huge potential, it also presents obstacles such as low broadband penetration and speeds, local competition and content licensing complications.
Increasing Competition in Online Streaming
Netflix has been facing increasing competition in online streaming. Along with Amazon and Hulu, Blockbuster and Comcast have also entered this space. HBO plans to launch a stand-alone subscription service in 2015 and is expected to be a significant competitor to Netflix in the future. Dish and Sony are launching their own internet MVPD (multichannel video programming distributor) services. The growing competition can not only put pressure on Netflix's subscriber growth, but also increase content costs due to bidding by competitors.
Growing Focus On Improving Content and increasing Original Content
Netflix’s original content has improved perception of the overall brand. The company’s original programming has garnered critical acclaim by scoring multiple Emmy, Golden Globe and Academy Award nominations and several wins in the last two years. Shows such as House of Cards and Orange Is The New Black are drawing lot of audience and attracting customers to sign up. Netflix has effectively marketed these exclusive shows to maintain its subscriber momentum.
Besides some of the exclusive shows that we mentioned before, Netflix also signed a deal with Disney (NYSE:DIS) in 2012, to gain access to its content. During 2013, Netflix continued to expand its streaming content through deals with Turner Broadcasting, Warner Brothers Television Group, DreamWorks Animation and Hasbro Studios.
In November 2013, Netflix and Marvel Television (a subsidiary of The Walt Disney Company) announced a five-season deal to produce live action series focused on four Marvel superheroes. These series will be part of a roster of 30+ upcoming original series that Netflix plans to broadcast in 2015 and 2016.
As of 2014, films featured on Netflix include titles from DreamWorks, Relativity Media, Open Road Films, FilmDistrict, The Weinstein Company, Sony Pictures Animation and Walt Disney Studios Motion Pictures (including Walt Disney Pictures, Walt Disney Animation Studios, Pixar, Lucasfilm and Marvel Studios) among others.
Trefis Forecast Rationale for Netflix's U.S. Streaming Subscribers
This figure represents number of Netflix subscribers in the U.S. that subscribe to its streaming service. This number included both streaming-only and hybrid (streaming+DVD) subscribers till 2011. Netflix separated the streaming and DVD service plans in 2011 and this number now represents only the subscribers for streaming portion of the service. These subscribers may or may not be availing the DVD service separately. The subscriber figure is year-end figure.
Netflix started breaking out information in terms of streaming and DVD subscribers from 2011. Prior to 2011, from a modelling perspective, we have assumed that all of Netflix's subscribers were DVD subscribers who were getting streaming for free. It is only towards end of 2010 that Netflix launched streaming-only plans in the U.S. Therefore, the historical data does not exist, except for 2011 when the figure stood at 21.7 million. By the end of 2014, the U.S. streaming subscriber base was around 39.0 million.
During the third quarter of 2014, domestic streaming subscriber additions fell significantly short of the company’s guidance. Based on our analysis, we find some evidence of subscriber growth moderating and we believe that incremental customer additions will become difficult for Netflix in the future.
Going forward we expect these subscribers to increase, although at a reduced rate compared to what the company has seen for its subscriber base in past few years.
We considered following factors in our forecast:
- Growing Focus On Original Content
- Netflix’s original content has improved perception of the overall brand. The company’s original programming has garnered critical acclaim by scoring multiple Emmy, Golden Globe and Academy Award nominations and several wins in the last two years. Shows such as House of Cards and Orange Is The New Black are drawing lot of audience and attracting customers to sign up. Netflix has effectively marketed these exclusive shows to maintain its subscriber momentum.
- The company plans to build on this success by growing the percentage of its content spending dedicated to original content in the coming future. The company will launch 320 hours of original content in 2015, triple the amount of original programming Netflix released in 2014.
- Besides some of the exclusive shows that we mentioned before, Netflix also signed a deal with Disney (NYSE:DIS) in 2012, to gain access to its content. During 2013, Netflix continued to expand its streaming content through deals with Turner Broadcasting, Warner Brothers Television Group, DreamWorks Animation and Hasbro Studios.
- In November 2013, Netflix and Marvel Television (a subsidiary of The Walt Disney Company) announced a five-season deal to produce live action series focused on four Marvel superheroes. These series will be part of a roster of 30+ upcoming original series that Netflix plans to broadcast in 2015 and 2016.
- As of 2014, films featured on Netflix include titles from DreamWorks, Relativity Media, Open Road Films, FilmDistrict, The Weinstein Company, Sony Pictures Animation and Walt Disney Studios Motion Pictures (including Walt Disney Pictures, Walt Disney Animation Studios, Pixar, Lucasfilm and Marvel Studios) among others.
- Home entertainment market is unsaturated and offers ample scope to grow
- The US home video market consists of more than 90 million pay TV subscribers
- A substantial number of these (digital cable TV subscribers, for example) have access to
Video On Demand and use it on a fairly regular basis
- Around 100 million US households have a DVD player and are thus potential targets
- Even a dedicated movie channel like HBO has close to 40 million subscribers
- These are much larger than Netflix's current subscriber base, implying ample growth opportunities
- Streaming-only service is gaining adoption
- Ever since its launch, streaming-only service has gained tremendous adoption in the U.S. and accelerated Netflix's subscriber gains until recently
- The presence of wide variety of devices available to play Netflix's movies via internet significantly enhances customer experience. This will continue to be a catalyst for streaming subscribers in the U.S.
- The subscriber growth, in essence, is being fueled by media consumption shifting to internet
Back to Company Overview
- The competition is growing
- HBO plans to launch a stand-alone subscription service in 2015 that will not require an existing television subscription to use. HBO has a significant original content roster of its own, including critically acclaimed shows like Game of Thrones, Boardwalk Empire and True Detective. HBO is expected to be a significant competitor to Netflix in the future.
- Dish and Sony will be launching internet MVPD (multichannel video programming distributor) services. Hulu and Comcast's Xfinity Streampix also pose a threat.
- Amazon’s original series Transparent has tasted success as well as critical acclaim. The company now plans to broadcast a series created by Woody Allen and also plans to enter the movie-making business.
- Although Netflix's content advantage still exists, each of its competitors has deep pockets and can spend heavily on content to pose tough competition for Netflix. The increased competition will make it difficult for Netflix to raise prices and gain market share.
- Price rises will have an adverse effect
- Netflix faced considerable customer backlash in later half of 2011 due to price increases. It also witnessed reduced demand for new subscriptions in the months following its May 2014 price hike. Additional price hikes can cause the demand for new streaming subscriptions to taper off.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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