Netflix (NASDAQ:NFLX) is a movie rental company that delivers content online and via the U.S. Postal Service (USPS). Netflix is one of the postal service’s biggest corporate customers and could face higher DVD shipment costs if proposed postal rate hikes go through.
In this scenario we see a potential downside of 4% to the $85.05 Trefis price estimate for Netflix’s stock. Our analysis follows below.
USPS losses motivate proposed rate hikes
USPS continues to face losses as a result of declining mail volume in a weak economy. Despite $6 billion in cost-cutting measures, the U.S. government agency posted net loss of $3.8 billion in 2009, up from a $2.8 billion loss in 2008. During the same period, mail volume declined by about 12%, from 202 billion to 177 billion.
In an effort to resolve its budget crisis, USPS is asking Congress to authorize tiered rate hikes: 8% increase for periodicals, 23% for standard mail parcels and 7% for media or library mail. If these increases go through, Netflix faces shipping cost increases in the range of 7% to 8%.
Netflix could face increased costs of about $30 million in 2011
In the past, USPS rates have increased at a low annual rate of about 1% to 2% each year. We currently expect Netflix’s postage cost per DVD to rise by about 2% in 2011, to 44 cents. The proposed rate hikes would boost this cost to 46 cents, yielding total incremental shipping costs of $30 million for next year.
Given Netflix’s high subscriber growth, total shipping costs will likely rise more in subsequent years. We estimate that these increased costs could result in a downside of about 4% to Netflix’s stock. You can drag the trend-line in the chart above to create your own forecast for Netflix’s postage cost per DVD and see how it impacts the company’s stock price.
You can see the complete $85.05 Trefis price estimate for Netflix’s stock here.
