We came across this article that makes an interesting point about how Netflix (NASDAQ:NFLX) is doing well in the U.S., and that alone warrants a bullish price on the company. A Citigroup (NYSE:C) analyst seems to be bullish on the price citing lucrative DVD subscriber base as well as large streaming base in the U.S as the prime reasons. 
While being bullish makes sense as far as we are concerned, we do not fully agree with the reasons. We believe that a significant amount of our Netflix’s estimated value, roughly 30%, comes from the expected growth in international markets whereas we place a very low value on DVD subscriptions due to their inevitable expected decline.
We estimate that Netflix will have more than 20 million international subscribers by the end of our forecast period who will be paying roughly $7 per month out their pockets. That amounts to close to $140 million of monthly revenue and and more than $1.5 billion of yearly revenue.
Why are we positive about this?
We believe that the broader shift to internet in developed economies as well as developing economies produces a tremendous opportunity for the streaming companies to be the first one to tap this market. Netflix has the expertise and brand name that it can leverage, and strike local deals and leverage present content to create a compelling offering in international markets. Even if developing economies are slower to adopt it, it may disrupt profits in short-term but eventually they will catch up.
Are DVDs Where The Money Is?
Furthermore, we feel that the analyst is correct in being optimistic about Netflix’s U.S. streaming subscriber base which roughly brings in 60% of the Netflix’s estimated value as per our estimates. However, DVD subscriptions may not be something to be happy about. Netflix has stated that DVD declines are going to continue each year, and it’s unlikely that this subscriber base will grow or stabilize. DVD rental was Netflix’s bread and butter business couple of years back but things have changed drastically since then. The change in prices, adoption of streaming and heavy spending on streaming content by Netflix, all point to a different future. Even though the DVD business has high margins now, the expected continuous decline in the future will shrink cash profits and thus this division warrants a low valuation.
Our price estimate for Netflix stands at $110, implying a premium of about 35% to the market price.Notes: