- International Streaming Subscriptions constitute 52% of the Trefis price estimate for Netflix's stock.
- U.S. Streaming Subscriptions constitute 48% of the Trefis price estimate for Netflix's stock.
WHAT HAS CHANGED?
- Latest Earnings
Netflix delivered second quarter global net subscriber additions of almost 10 million. This was in addition to 16 million subscribers added in Q1 2020, thus bringing the total subscriber additions to 26 million in the first six months of 2020. To put this into perspective, Netflix added 28 million subscribers in all of 2019. However, subscriber addition slowed in Q3 2020, with the company adding only 2.2 million as people started moving out after lockdowns were lifted gradually. Revenue hit $6.4 billion in Q3 2020, registering a 22% y-o-y growth. However, the stock price declined after the results announcement as Netflix missed both the revenue as well as earnings targets.
- Q1 2020 Earnings
Netflix released its Q1 2020 earnings report after the market close on April 21, 2020. The streaming content giant’s stock had soared ahead of earnings as investors anticipated an excellent quarter fueled by consumers forced to stay at home amidst the ongoing Covid-19 lockdown. Netflix delivered first quarter global net subscriber additions of almost 15.8 million, as against the company's own guidance of about 7 million new subscribers and Wall Street consensus of a little less than 8 million. However, the mind-boggling subscriber addition couldn't translate into a sharp rise in revenue, which came in at $5.77 billion in Q1 2020, just ahead of $5.76 billion estimated. Revenue was affected by a strong dollar which led to subdued international revenues despite more subscribers. EPS of $1.57 missed consensus estimate of $1.61 for the quarter.
- Effect of Coronavirus
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The shutdowns in major cities across the globe has led to people sitting at home. Home confinement led to to higher demand for streaming services and home entertainment options. This was reflected in the sharp rise in Netflix’s subscriber count in Q1 and Q2 2020, with more people streaming content. However, Netflix faces strong competition from established players like Amazon and new entrants like Disney+. Netflix managed to surprise the markets with net paid subscriber additions of 26 million in the first half of 2020, double market expectations. However, the investors are not as enthused as this was a one-time bonanza with future subscriber growth being pulled forward, which means the next few quarters will have subdued subscriber growth
- FY 2019 Earnings
Netflix saw its stock price jump by almost 28% over the ending four months (Oct 2019 to Jan 2020), on account of better than expected international streaming growth and continuously improving profitability. Though the company beat revenue and earnings consensus for Q4 and FY 2019, the stock price fell by 3.5% a day after the earnings announcement, as Netflix missed new subscription growth in the US for the third quarter in a row. However, the company’s international streaming growth surpassed expectations.
- Netflix's international growth
Netflix’s international growth has been solid so far, as the company has rolled out its service to a number of markets. Netflix has been targeting the Asia-Pacific in a big way, and the market holds a lot of promise for Netflix. We believe that Netflix will experience healthy adoption rates in the newly launched countries on the strength of its original content and its competitive pricing. Netflix’s international subscriber base has grown from 1.9 million customers in 2011, to nearly 115 million by the end of 2019. Taking a long-term perspective, we believe that Netflix can cross 240 million international subscribers by the end of our forecast period.
- International margins under pressure due to rapid expansion
Netflix’s international streaming margins have improved steadily over the years, climbing from -127% in 2012 to 11.1% in 2018, before dropping to 6.2% in 2019. While the margins were put under pressure last year due to the additional costs which were undertaken to expand its content library, we believe that as Netflix starts experiencing operational efficiencies in its target countries the margins will improve. The marketing expenses will also come down as a percent of sales, once the company establishes itself in these countries.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Netflix's value that present opportunities for upside or downside to the current Trefis price estimate for Netflix:
Netflix's U.S. Streaming Subscribers: Currently we forecast Netflix's U.S. streaming subscriber base to increase from around 63 million in 2019 to more than 78 million by end of our forecast period. There could be more than 10% downside to our price estimate if this figure remains below 68 million instead. This could happen if the market growth for streaming slows down, and competition weighs heavy in the future. On the other hand, there could be around 10% upside to our price estimate if Netflix blows past expectations, and captures more than 100 million U.S. subscribers.
Domestic Streaming Contribution Margin: Currently we forecast this figure to rise from about 37.7% in 2019, to close to 44% by the end of our forecast period. However, there could be a downside of about 10% to our price estimate if the margin was to decline to 28%. On the other hand, there could be upside of about 10% if this figure was to increase to over 50% instead.
For additional details, select a driver above or select a division from the interactive Trefis split for Netflix at the top of the page.
Netflix offers video rental service in the form of DVDs, as well as online streaming to U.S. customers. The company also offers streaming services in international markets and is currently available in about 200 countries.
Netflix's content is available for streaming through a variety of devices such as PCs, Macs, video game consoles, tablets, and smartphones. The company is consistently working toward striking more content deals in order to improve its online library.
In the case of DVDs, Netflix's customers can choose the videos they want to rent from an online library available on the company's website. Unlike traditional video rental businesses, such as Blockbuster and Redbox, Netflix does not have any store locations and instead delivers DVDs through the postal mail.
SOURCES OF VALUE
The majority of Netflix's value is currently hinged on its U.S. Streaming services for the following reasons:
Firstly, the DVD subscribers are expected to decline significantly in the U.S., while streaming subscribers are expected to grow. The home video market is growing in the U.S. and streaming is the best way to tap into it given the proliferation of multiple internet-enabled devices. Netflix has seen rapid adoption of its streaming plans in the U.S. Although the competition is intensifying, Netflix remains a leader in the streaming segment.
Secondly, the international streaming business is currently a relatively lower value contributor, but this is expected to change in the future as the US streaming market becomes saturated. Netflix has expanded into more than 190 countries.
There is a very clear shift of video consumption to the Internet, and Netflix is one of the companies leading this change. The company's DVD subscribers are declining and future growth will come from streaming subscribers. Eventually, the company would like to replace all of its physical DVDs with the online library.
Netflix has been rapidly rolling out its service into new markets and has seen a strong uptake in those markets. We expect that to continue going forward. The company now has a presence in more than 190 countries.
Increasing Competition in Online Streaming
Netflix has been facing increasing competition in online streaming. Along with Amazon and Hulu, there are more and more streaming options from companies such as CBS, HBO, Disney+ and Apple.
Growing Focus On Improving Content and increasing Original Content
Netflix’s original content has improved the perception of the overall brand. The company’s original programming has garnered critical acclaim by scoring many award nominations in recent years, including, House of Cards, Orange is the New Black, The Crown, Stranger Things Series, to name a few. Netflix has effectively marketed these exclusive shows to maintain its subscriber momentum.