A Closer Look At Netflix’s Valuation

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Trefis
NFLX: Netflix logo
NFLX
Netflix

Netflix (NASDAQ: NFLX) continues to see strong growth and now has over 139 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 2018, the company’s revenues increased 35% year-over-year (y-o-y) to $15.8 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 What Is Netflix’s Fundamental Value Based on Expected 2019 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). In addition, you can also see more Trefis Media data hereNetflix saw its stock gain nearly 30% in 2018 and is already up more than 40% over the course of 2019. We have maintained our long-term price estimate for the company at $378. Our price estimate is in-line with 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 2019.

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Although a major chunk of Netflix subscribers come from the international segment, its contribution margins are substantially lower (8.5%, as of 2018) compared to margins from its domestic segment (33.8%). 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 this year. However, we expect Netflix’s net subscriber additions to gain momentum in 2019 – based on the fact that the company is spending a significant portion of its content budget on original shows. Netflix plans to spend as much as $15 billion on shows and movies in 2019, up from $12 billion earmarked for content in 2018, which should drive subscriber growth but will weigh on margins. We expect Netflix to benefit from healthy subscriber growth, which can lead 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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