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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 about 55.3 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 28.4% in 2014 to close to 38.2% 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 33%. On the other hand, there could be upside of about 8.5% if this figure was to increase to 43.5% 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. 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 and in 2014 due to price increase, it did fairly well in the intermediate period.
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, international markets like Latin America can have lower broadband penetration and per capita income, thereby making any rapid growth in these regions 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. 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 over 40 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. 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 stated that its content advantage has been one of the key drivers of its U.S. streaming subscriber growth since 2013. The company has added original and exclusive programming to its streaming library, which is paying off. TV series such as House of Cards, Lilyhammer 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.
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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