VALUATION HIGHLIGHTS

1. International Streaming Subscriptions constitute 61% of the Trefis price estimate for Netflix's stock.
2. U.S. Streaming Subscriptions constitute 39% of the Trefis price estimate for Netflix's stock.

WHAT HAS CHANGED?

1. Q4 2023 Earnings

Netflix posted a better-than-expected set of Q4 2023 results, as the rollout of paid sharing and stronger content releases drove growth. The company posted revenue of $8.83 billion for Q4, up 12% compared to the last year. Net income came in at $937.8 million, or $2.11 per share. Netflix added a total of 13 million subscribers over the quarter, taking its total susbcriber base to 260.8 million paid subscribers.

2. Netflix Ad-Supported Plan

In late 2022, Netflix rolled out a new ad-supported plan called Basic with Ads in 12 countries, including the U.S. The plan is priced at $7 per month, $3 below the current Basic plan. We think the price point will help Netflix with its subscriber ads, given that its traditional ad-free plans have become increasingly expensive over the years, proving an issue for Netflix, particularly in the current environment with inflation hurting household budgets and consumer spending.

3. Broader crack down on password sharing

Netflix plans to roll out paid password sharing, which it tested in parts of Latin America, into the U.S. during Q2 2023. Under the offering, subscribers have the option to pay an extra fee if they want to share their Netflix account with people they do not live with. While the company could see some initial subscriber churn due to the rollout, the move should help to eventually boost revenue.

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 74.3 million in 2022 to about 82 million by the end of our forecast period. There could be more than a 5% downside to our price estimate if this figure remains flat going forward. This could happen if the market growth for streaming slows down and competition weighs heavily in the future. On the other hand, there could be around a 10% upside to our price estimate if Netflix blows past expectations and captures well over 100 million U.S. subscribers.

Netflix Contribution Margin: We forecast this figure to rise from about 34% in 2022 to close to 37% 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 32%. On the other hand, there could be an upside of about 10% if this figure increased to over 40%.

For additional details, select a driver above or a division from the interactive Trefis split for Netflix at the top of the page.

BUSINESS SUMMARY

Netflix offers online video streaming services to U.S. and international customers, with services available in over 190 countries. Netflix's content is available for streaming through various devices such as PCs, video game consoles, TVs, and smartphones. The company has over 230 million paying subscribers globally. The company also offers DVD rentals via mail, although the revenues for the segment have been on the decline.

SOURCES OF VALUE

The majority of Netflix's value is currently hinged on its International Streaming services for the following reasons:

While streaming subscriber growth in the U.S. is expected to moderate, Netflix should see growth in international markets, driven by increasing global broadband and mobile device penetration. The company has also been increasing its investments in regional content to attract audiences. For perspective, we project that Netflix's subscriber base in international markets will grow from around 156 million in 2022 to over 230 million by 2029. On the other hand, we expect its U.S. subscriber base to rise from 74 million to just about 80 million over the same period.

KEY TRENDS

Netflix's international growth

Netflix's international growth has been solid as it has rolled out its service to many markets. Netflix has been targeting the Asia-Pacific in a big way, and the market holds a lot of promise for Netflix. Netflix's international subscriber base has grown to nearly 160 million at the end of 2021. Taking a long-term perspective, we believe that Netflix can come close to 230 million international subscribers by the end of our forecast period.

Increasing Competition in Online Streaming

Netflix has been facing increasing competition in the streaming space from the likes of Amazon, Disney, Comcast, Paramount, and Apple, who have doubled down on content investments as they look to add new subscribers. The competition appears to be impacting Netflix's subscriber growth. For example, in 2021, Netflix added just about 18 million paid subscribers, compared to Disney+, which grew its subscriber base by almost 35 million.

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, and the Stranger Things series, to name a few. Netflix has effectively marketed these exclusive shows to maintain its subscriber momentum.