Netflix (NFLX)

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WHAT HAS CHANGED?

  1. Netflix's international surge

Netflix’s international growth has been exceptional 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 63 million by the end of 2017. Taking a long-term perspective, we believe that Netflix can cross 129 million international subscribers by the end of our forecast period.

  1. 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 6.69% in 2017. While the margins were put under pressure last year due to the additional costs 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. We believe that Netflix’s international segment will report significant growth in contribution margin from 2018 onward.

  1. End of Deal with Disney can help subscriber growth

In 2017, Disney ended its deal to feature its content on Netflix. The end of this deal can materially impact Netflix's subscriber base in the coming years as subscribers looking to watch Disney content might signup with Disney and its streaming app.

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 54.8 million in 2017 to more than 80 million by end of our forecast period. There could be more than 10% downside to our price estimate if this figure remains below 65 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 around 98 million U.S. subscribers.

Domestic Streaming Contribution Margin: Currently we forecast this figure to rise from about 38.5% in 2017, to close to 40.3% 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 35%. On the other hand, there could be upside of about 10% if this figure was to increase to 45% 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.

BUSINESS SUMMARY

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 towards 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 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 around 200 countries. The progress has been so strong that the company now believes it can complete its global expansion phase by the end of 2016 while managing to still be profitable.

KEY TRENDS

Online Streaming

There is 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 online library.

International Expansion

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 around 200 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, and soon to be Disney and ESPN.

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. Netflix has effectively marketed these exclusive shows to maintain its subscriber momentum.

Recent Trefis Articles

Netflix’s Stock Tanks On Missed Subscriber Expectations

Netflix (NASDAQ: NFLX) announced weaker-than-expected second quarter results, as its earnings per share came in ahead but revenue fell short of market expectations. In addition, Netflix's subscriber growth slowed and missed expectations of 6.27 million and reported net streaming additions of 5.15 million in the quarter. ...More



Netflix’s Streaming Business To Remain Strong In Q2

Netflix (NASDAQ: NFLX) is scheduled to announce its second quarter results on Monday, July 16. The company reported solid first quarter results, as both its revenue and earnings per share came in ahead of market expectations. The company's revenue grew a robust 40% year-over-year (y-o-y) to $3.7 billion. This was driven by strong growth in subscribers across both the U.S. ...More



Netflix Rides Subscription Growth To Solid Q1

Netflix (NASDAQ:NFLX) announced solid first quarter results, as both its revenue and earnings per share came in ahead of market expectations.The company's revenues grew a robust 40% year-over-year (y-o-y) to $3.7 billion. This was driven by strong growth in subscribers across both the U.S. and international streaming markets. ...More



A Look At Our $304 Price Estimate For Netflix

Netflix (NASDAQ: NFLX) continues to see strong growth, and now has over 117 million streaming subscribers in over 190 countries with a vast range of TV shows and movies, including original series, documentaries and feature films. In 2017, the company’s revenues increased 32% year-over-year (y-o-y) to $11. ...More



How Is Netflix Likely To Grow In The Next 2 Years?

Netflix (NASDAQ: NFLX) continues to see strong growth, and now has over 117 million streaming subscribers in over 190 countries with a vast range of TV shows and movies, including original series, documentaries and feature films. In 2017, the company’s revenues increased 32% year-over-year (y-o-y) to $11. ...More



Want To Track Facebook, Netflix, and Twitter’s Stock Price Next To Your Own Productivity Index?

Do you know your personal productivity score? In an era where Netflix, Facebook, and Twitter rule, and with the 2018 first quarter earnings season coming up, the average-time-spent-per-user is a metric that matters for these companies. ...More



Netflix Earnings: Subscriber Additions Propel Stock To An All Time High

Netflix's (NASDAQ:NFLX) stock hit an all-time high on Monday as the company posted its fourth quarter results, which were better than expected due to strong growth in subscribers across both the U.S. and international streaming markets. The company posted 32.6% year on year growth in revenues to $3.4 billion, in line with our expectation. ...More



What To Expect From Netflix’s Q4

Netflix (NASDAQ:NFLX) is set to announce its fourth quarter results on Monday, January 22. Despite the intensifying competition in the over-the-top (OTT) streaming market, we expect Netflix to report growth in revenues and subscribers across both the domestic and international markets. ...More



A Closer Look At The Importance Of Netflix’s Original Content

Netflix's (NASDAQ:NFLX) results in the first three quarters of 2017 have been encouraging. The company continued its strong run in the streaming business with significant growth in international subscribers, while domestic subscriber growth has been solid despite the intense competition in the domestic streaming business. ...More



Netflix’s DVD Business Declines Aren’t A Big Deal

Netflix's (NASDAQ:NFLX) DVD subscription business has been on a down-slide for a while due to a broader change in digital video industry dynamics, the increasing popularity of online streaming and Netflix's decision to separate its DVD and streaming plans. ...More



What Is The Potential Upside To Netflix’s International Streaming Business?

Netflix’s (NASDAQ:NFLX) international streaming business has been a major growth driver in recent years, as the company has launched its operations in several new geographies. According to Trefis estimates, the international streaming subscription business accounts for around 44% of Netflix's value. Revenues have grown at a CAGR of 108% in the last five years. ...More



What Is The Potential Upside To Netflix’s Domestic Streaming Business?

Netflix’s (NASDAQ:NFLX) domestic streaming business is the cash cow for the company, and one of the primary sources for funding its geographic and content expansion. While the domestic business has reported stellar growth in recent years, its growth is slowing down somewhat as the market matures. According to Trefis estimates, the U.S. ...More



The Factors Behind Netflix’s 60% Stock Rally In 2017

Netflix (NASDAQ:NFLX) has seen its stock gain nearly 60% this year, significantly outpacing the S&P 500, which is up by less than 21% year to date. ...More



How Much Will Subscription Rate Hikes Help Netflix?

Netflix’s (NASDAQ: NFLX) subscription prices are set to increase in December. While the standard U.S. subscriptions will jump from $9.99 to $10.99, the premium tier pricing will increase even more, from $11.99 to $13.99. ...More



How Much Will Content Costs Impact Netflix’s Cash Flows?

Netflix’s (NASDAQ:NFLX) streaming revenues have increased from $3.46 billion in 2013 to $8.29 billion in 2016, a compound annual growth rate (CAGR) of 34%. For the first three quarters of 2017, streaming revenues swelled to over $8 billion and are expected to reach over $11 billion for the year. ...More



Netflix’s Membership Soars As Spending On Content Creation Continues

Netflix's (NASDAQ:NFLX) stock hit an all-time high on Monday as the company posted its third-quarter results, which were better than expected due to strong growth in subscribers. The company posted 30% year on year growth in revenues to $2.99 billion. ...More



Netflix’s Revenues Set To Grow As Membership Swells

Netflix (NASDAQ:NFLX) is set to announce its third-quarter results on Monday, October 16. While competition among over-the-top (OTT) streaming services is intensifying, we expect Netflix to report growth in revenues and subscribers across both the domestic and international markets. ...More



Disney Deal Expiry Unlikely To Impact Netflix In The Long Term

Disney recently announced that it will be pulling its content from Netflix (NASDAQ:NFLX) once its deal with Netflix expires at the end of 2018. Disney plans to launch its own streaming services for its original content, and as such will be removing its content from competing plat... ...More



Why We Revised Our Price Estimate For Netflix To $170

Netflix’s (NASDAQ:NFLX) stock has soared in the past month as the company posted better than expected growth in the international market, and witnessed over 53% growth in international streaming revenues in Q2 2017. Furthermore, the international business' margins are improving, which should help boost the company's overall profitability in 2017. ...More



Netflix Q2 Earnings: Stock Soars As Company Beats Guidance And Expectations

Netflix's (NASDAQ:NFLX) stock hit an all-time high on Monday as the company posted its second quarter results, which were better than expected due to strong growth in subscribers. The company posted 32% year on year growth in revenues to $2.78 billion. ...More



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