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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 27 million in 2012 to about 45 million by end of the Trefis forecast period. There could be more than 15% downside to the Trefis price estimate if this figure were to increase to only about 35 million instead of 45 million. This could if the market growth for streaming slows down and competition weighs heavy in the future. On the other hand there could be 20% upside to the Trefis price estimate if Netflix can blow past expectations and capture more than 45% of U.S. households by end of the Trefis forecast period, implying a subscriber base of about 58 million U.S. subscribers.
Domestic Streaming Contribution Margin: Currently we forecast this figure to rise from about 19% in 2012 to close to 29% by the end of our forecast period. However there could be a downside of about 10% to the Trefis price estimate if these cost were to reach a figure of only 25% of total revenues. On the other hand, there could be upside of about 20% if this figure was to increase to 35% 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. Unlike traditional video rental businesses such as Blockbuster and Redbox, Netflix does not have any store locations and instead delivers DVDs through postal mail in the U.S. and allows its subscribers to view films online.
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. Netflix delivers these DVDs/Blu-Rays to its customers as early as the next day (under its Next Day Delivery service). These customers can keep the DVD for as long as they want and are not charged any late fee. The company offers different subscription packages based on the number of DVDs its customers can rent at any given point of time.
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 its growth suffered in 2011 due to price increase, it has done fairly well in 2012.
Secondly, the international streaming business is likely to remain a relatively lower value contributor for several years because Netflix will face high content costs as well as local competition and resistance. Moreover, markets such Latin America have lower broadband penetration and per capita income, thereby making any rapid growth in this region difficult for Netflix.
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. 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. Going forward, Verizon and Redbox will be launching streaming service in partnership and this space is only going to get crowded. This can not only put pressure on Netflix's subscriber growth, but also increase content costs due to bidding by competitors.
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, be it in form of streaming-only plans or hybrid plans (streaming+DVD). 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. In 2012, the U.S. streaming subscriber base reached past 27 million.
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:
- 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
- Netflix will face increased competition from Amazon, Blockbuster, Verizon-Redbox, Hulu and Comcast's Xfinity Streampix in the future. 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.
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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