Netflix (NASDAQ:NFLX), an online movie rental company, continued with its strong subscriber growth in the first quarter of 2010. We have updated our price estimate for Netflix’s stock by 44% from $57 to $82, mainly attributable to the higher than expected subscriber growth and the positive trends evident in its recent quarterly earnings.
Netflix has upgraded its subscriber base guidance for 2010, based on which we have revised our forecast for Netflix subscribers from 14.7 million to more than 16.5 million by end 2010. This implies that Netflix has an opportunity to see its subscriber base grow by 35% in 2010, versus 30% growth observed in 2009 and higher than the 20% growth we had originally forecast.
We also now forecast that Netflix’s subscriber base will reach 36 million by the end of Trefis forecast period, up from our earlier forecast of 28 million.
Customers have historically been attracted to the convenience of have Netflix films delivered through the mail and online. The company’s wide content catalog and quick delivery help it to retain customers. A few recent developments have helped Netflix subscribers to grow even further:
1) Distribution on new platforms (Xbox, Wii, iPad) are making Netflix subscriptions more attractive
Netflix is consistently trying to diversify its distribution channels. Apart from renting DVDs via mail, its subscribers can watch content online through several devices like TV set top boxes, gaming consoles (Xbox, Wii), personal computers and most recently the iPad. Netflix also plans to bring its content to iPhones in the near future.
Access to films online are included in Netflix’s monthly subscription fee and customers do not pay extra money. Although Netflix offers a variety of subscription packages, it low fee $8.99 per month option is luring new subscribers and help to keep subscriber churn low.
2) TV shows are successfully complimenting online movie catalog
Netflix maintains that its customers are satisfied with its improving online catalog. Although Netflix’s online catalog is currently much smaller than its mail DVD catalog, Netflix is trying to compliment its online movie content with TV shows. Entering into licensing deals with networks like NBC, ABC and Fox is a step in this direction.
The number of subscribers actively streaming Netflix’s content increased to 55% compared to 48% in the last quarter of 2009. Netflix stated that TV viewing represents a significant percent of online viewing hours for its customers. Availability of TV shows is thus proving to be an effective way to engage users online.
3) 28-day new release restriction has had minimal impact on Netflix subscriptions
As a result of negotiations with film studios, Netflix is restricted from renting out new release movies for the first 28 days after a movie is released on DVD. Since demand for new release films constitutes a significant portion of rental demand, this is could have an important impact on Netflix. However, it hasn’t caused noticeable dissatisfaction among Netflix subscribers to date.
Netflix subscribers, who typically watch new releases early, are either buying DVDs or watching movies via pay-per-view offerings; however, they are still continuing with their Netflix subscription.
Netflix experienced one of the lowest subscriber churns (3.8%) in the first quarter of 2010, indicating minimal subscriber losses due to lack of availability of new releases early.
You can modify the forecast above to see the impact on Netflix’s stock if it were to gain subscribers at a faster pace than we estimate.
For additional analysis and forecasts, here is our complete model for Netflix’s (NFLX) stock.
