While Netflix’s (NASDAQ:NFLX) Q1 2012 earnings results were promising, the revenue outlook was weaker than consensus analyst estimates thus resulting in stock plunging. Nevertheless the subscriber trends seem to have improved and the overall subscriber outlook for 2012 is better than previously estimated. The downside is that long-term subscriber expansion ability is in doubt and there is hardly any indication that Netflix’s content costs will come down notably. Consequently we have reduced our price estimate for Netflix’s stock to $110. Netflix competes with other streaming service providers such as Amazon (NASDAQ:AMZN), Dish Network’s (NASDAQ:DISH) Blockbuster, Comcast’s (NASDAQ:CMCSA) Xfinity Streampix, Hulu and others.
Streaming Subscriber Growth Back, DVD Subscriber Losses Tapering Off
Netflix added over 1.7 million net domestic streaming subscribers. This figure pales in comparison to Q1 2011 subscriber additions but stands head to head with Q1 2010 figure. If we compare it to the last two quarters, it is a huge jump. The company has been able to partially recover from the damage it faced last year when it announced a significant pricing change. Netflix has acknowledged that it may take another couple of years for the company to fully recover from that damage. Nevertheless things are looking better as of now in our view.
Furthermore, the company has stated that the DVD subscriber losses are slowing down, although we feel that they will continue as streaming offering becomes more powerful. DVDs are still more profitable than streaming but their inevitable decline makes this business of little value in long run. Netflix is going to be all about streaming in the future.
Q2 Streaming Outlook Lower, But That Is Seasonality
Netflix’s streaming subscriber forecast for Q2 2012 is substantially lower than what the company saw in Q1. However, the major part of this expectation is seasonality. If we look at the historical data, we note that the Q2 net subscriber additions tend to be substantially lower than Q1 net additions.
However, the expected drop that Netflix is forecasting seems to be relatively higher than what we have seen historically. Perhaps the churn is higher and getting incremental subscribers is getting little difficult for Netflix. The other reason could be that the initial subscribers who joined Netflix in the past few years are more entertainment savvy. The company is going to need to work a little harder on retaining newer subscribers who may not be as hooked to streaming as the early adopters.
Long-Term Competition Is A Concern
Long-term domestic subscriber growth is under doubt while international growth looks promising. The competition is developing in the U.S. and Netflix will need to spend heavily to differentiate itself. Additionally, as we mentioned above, retaining newer subscribers who are not early adopters of streaming might be a little harder. Such subscribers may look through streaming content, and at times may not find it very appealing and leave Netflix thus leading to a higher churn. While we have increased our international subscriber growth forecasts, we have reduced the same for domestic streaming business.
Our price estimate for Netflix stands at $110, implying a premium of about 25% to the market price.