A Closer Look At Netflix’s Valuation
Netflix (NASDAQ: NFLX) continues to see strong growth and now has over 124 million paying subscribers in over 190 countries along with a vast range of TV shows and movies, including original series, documentaries and feature films. In the first half of 2018, the company’s revenues increased 40% year-over-year (y-o-y) to $7.6 billion, largely driven by growth in subscribers across both the U.S. and international streaming markets. The company’s solid international growth has come despite stiff competition from the likes of Amazon and Hulu, as well as local content providers in various markets. This will likely continue going forward, as the company continues to invest in original content.
We have summarized our forecasts for Netflix’s fundamental value based on expected 2018 results in an interactive model. You can modify assumptions such as changes in expected segment revenue or EBITDA margins to see how they impact the company’s value. The image below shows one of the key steps in identifying Netflix’s valuation sensitivity to changes in its segment revenues. We detail how changes in revenue or segment EBITDA margin impacts total EBITDA, which then impacts its enterprise value (assuming a constant EBITDA multiple).
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Netflix saw its stock gain nearly 50% in 2017, and is already up more than 70% over the course of 2018. The company’s stock price has fluctuated between $300 and $418 since April. We have maintained our long-term price estimate for the company at $370. Our price estimate is around 8% ahead of the current market price, which is driven by the company’s strong foothold in the streaming business as well as a robust lineup of TV shows and films in 2018.
Although a major chunk of Netflix subscriber comes from the international segment, its contribution margins are substantially lower (15.4%, as of June 2018) compared to margins from its domestic segment (38.7%). The U.S. market for streaming content is getting more saturated due to strong competitive pressure, which is expected to intensify once Disney launches its own direct-to-consumer offering and pulls its content from Netflix in 2019. However, we expect Netflix’s net subscriber additions to gain momentum in 2018, despite the company missing subscriber estimates in its recent Q2 earnings and guiding for a lower net subscriber expectation in Q3. Our assumption is based on the fact that the company is spending a significant portion of its content budget on original shows. The company has a long-term goal of ensuring that nearly 50% of the content streamed on its platform is original. Netflix plans to spend as much as $13 billion on shows and movies in 2018, up from $6 billion earmarked for content in 2017, which should drive subscriber growth but will weigh on margins. We expect Netflix to benefit from healthy subscriber growth, which can leads to improved cash flows and can in turn allow the company to invest further in content.
Our forecasts for the year are summarized in our dashboards for Netflix. If you have a different view, you can modify various inputs to see how updated inputs impact the company’s valuation. You can share the links to scenarios created on our platform.
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