Netflix’s (NASDAQ:NFLX) shares gained 10% on Wednesday as Citigroup’s (NYSE:C) survey indicated that customer satisfaction has increased among Netflix subscribers.  The survey indicated that compared to 45% in the first two quarters of 2012, 48% of Netflix’s subscribers find the service extremely satisfying now.  We find the market reaction a bit unwarranted primarily for two reasons. First, the change of 3% (from 45% to 48%) is not a very significant change unless the sample size of the survey, which is unclear, was sufficiently large. Second, customer satisfaction was never an issue with Netflix except for a brief phase in 2011 when the company introduced price increases.
Netflix has always been, and still is, the leader in streaming and by-mail DVD rental businesses. Even though competitors are springing up, Netflix provides the best subscription streaming content as well as sufficiently good video quality. Its competitors such as Amazon (NASDAQ:AMAZN), Dish Network’s (NASDAQ:DISH) Blockbuster and Comcast’s (NASDAQ:CMCSA) Xfinity Streampix are still nowhere near in terms of content or subscriber base. Given the lack of viable options and customer adoption of streaming only plans over the past few quarters, we think that customer satisfaction is not really an issue.
Netflix’s problems are centered around rising content costs and potential of its new competitors. Even though these competitors may not be able to stand their ground against Netflix right now, their purchasing power and established customer base (for their main businesses) make them powerful opponents in the future.
Our price estimate for Netflix stands at $96, implying a premium of about 50% to the market price. Our current estimates suggest that Netflix will be able to defend its business overtime and that international opportunities will be successful. Changes in either of these driving assumptions would change our outlook, and you can modify our assumptions using our interactive charts.Notes:
- Netflix Gains Most Since July on Customer Satisfaction, Bloomberg Businessweek, Oct 3 2012 [↩] [↩]