Netflix (NASDAQ:NFLX) continued with its fast subscriber growth in the first quarter of 2010. Based on this positive trend, we have updated our stock price estimate to $82, about 25% below the current market price of $108.
The difference in the Trefis price estimate versus that of the market is an indication of the difference in our expectations, mainly on how we perceive subscriber growth to trend, and how well Netflix is placed to sustain and overcome competition from the growing on-demand and pay-TV industry.
Below we discuss what the current market price of $108 for Netflix’s stock would imply in terms of future expectations, and the risks involved for Netflix to get there.
Faster Than Expected Growth in Subscribers
The $100+ current market price for NFLX stock means that Netflix will need to sustain its high subscriber growth and reach a subscriber base of about 44 million, versus our current estimate of 36 million, by the end of Trefis forecast period.
A subscriber base of 47 million would represent about 39% of US households with DVD players (~120 million) and it would imply an average annual subscriber growth rate of close to 20%. In comparison, we estimate that Netflix will have nearly 17 million subscribers by the end of 2010, representing about 16% of US DVD households. The implied growth rate for our 2010 forecast is comparable to the 30% subscriber growth exhibited in 2009.
However, as Netflix’s subscriber base increases in the future, it will be challenging for the company to sustain a high growth rate of 20%. You can modify the forecast below to see how Netflix’s stock will be impacted if its subscriber base were to increase more than we forecast.
Disruption to Pay-TV Industry Necessary For Netflix To Sustain High Growth
Netflix is increasingly making efforts to improve its online content, thereby attracting more subscribers. Netflix is also complimenting its online movie content with TV shows to improve the overall viewing experience and customer satisfaction.
These efforts have resulted in the fraction of customers streaming regularly to increase from 48% in Q4 of 2009 to 55% in Q1 of 2010. Expansion of its streaming capabilities to multiple devices like computers, set top boxes, gaming consoles and recently the iPad will also benefit the company in the future.
However, we believe that Netflix will need to enrich its online content to a level where customers would prefer watching movies via Netflix subscription instead of paying for premium movie channels like HBO. Netflix’s online content still lacks such an appeal, but this will be necessary if it has to sustain high growth.
On-Demand Offerings from Pay-TV Providers Can Slow Down Netflix’s Subscriber Growth
Netflix needs to attract more pay-TV viewers to expand its subscriber base. The company is competing with cable and satellite pay-TV operators like Comcast, Time Warner Cable, and Dish Network, which are trying to compliment TV viewing by expanding their online and on-demand offerings. These pay-TV providers have a combined subscriber base of around 105 million subscribers and an increasing percentage has access to digital services like video-on-demand.
We believe that pay-TV providers will continue to strengthen their online offerings and can develop into a potential threat for Netflix and its subscriber growth.
For additional analysis and forecasts, here is our complete model for Netflix’s stock.