How Promising Is The 2014 Outlook For Netflix? A Look In Numbers

Jan.29.14 | About: Netflix, Inc. (NFLX)

Netflix (NASDAQ:NFLX) posted results that beat expectations and the stock moved up significantly. With this article I will try to model Netflix's growth for the coming year. For Q1 2014, I have used Netflix's guidance wherever possible (dark dashed lines in charts). The information for all charts is obtained from Netflix quaterly statements.

Netflix posted great earnings this quarter, but its revenue per subscriber is constantly declining, as it loses very profitable DVD customers and gains less profitable streaming customers.

While gross profits (Netflix calls these "contribution profit" and it is different from actual gross profits but good enough to draw some estimates from) in their US business per subscriber remained stable, Netflix has been posting significant reductions in losses for International streaming customers.

DVD contribution profits per subscriber are relatively stable around $15/subscriber. Domestic streaming shows a slight uptrend moving towards $5.50/subscriber by the end of the year. Currently it sits at $3.91/subscriber.

Overall, I expect the revenue decline per subscriber to start stabilizing as we approach the minimum possible that a subscriber can pay Netflix. In 2014, we will also start to see the effect of Netflix's new streaming plans. The effect of those plans is unknown and I will update this model later in the year if they have a significant effect on the revenues or profits per subscriber.


I expect Netflix Domestic Streaming subscribers to rise to around 40 million at the end of the year. For International Streaming, I expect the number to rise to over 15 million at the end of the year. I expect DVD customers next quarter to be just under 6.9 million, dropping to 6.5 million at the end of the year.

Based on the chart above (numbers in thousands):

Q1 2014 Q2 2014 Q3 2014 Q4 2014
Domestic Streaming Subscribers 35,670 36,428 37,964 39,499
International Streaming Subscribers 12,530 13,114 14,300 15,486
DVD Subscribers 6895 6736 6591 6459
Total 55,095 56,278 58,855 61,444
Click to enlarge

Here is an estimate of Netflix Share count (in thousands) based on past dilution:

Q1 2014 Q2 2014 Q3 2014 Q4 2014
Netflix Share Count 61,881 62,362 62,843 63,324
Click to enlarge

Based on the above two tables and the "Revenues and Earnings per Subscriber" chart, I have estimates of:

Q1 2014 Q2 2014 Q3 2014 Q4 2014 FY 2014
Revenue 1,271.845 1,296,645 1,353,647 1,410,931 5,333,068
Earnings 53,806 68,091 86,376 107,509 315,782

(Netflix Guidance 0.78)

1.09 1.37 1.7 5.03
Click to enlarge

I expect this kind of growth to continue in the future as Netflix expands its International presence and moves towards profitability in International markets. Compared to Pandora (NYSE:P), which has a forward P/E of 109 according to Yahoo! Finance, Netflix seems reasonably valued even after the run up. This would imply my estimate of forward P/E for Netflix is about 75. That is higher than the average analyst forward P/E for Netflix of 55 (from Yahoo! finance). Netflix currently sports a TTM EPS of 1.85. So growth to $5.05 represents greater than 170% growth.

However, considering that analysts have a much higher opinion of Netflix earnings than my charts, they believe that Netflix will break above current growth trends. This is possible by either getting to international profitability faster than I predicted or growing subscriber numbers faster than I predicted. The other explanation is that they believe the new plans will have a significant effect going forward. However, the trends in Netflix's growth are clear and it is very possible we might have a disappointment or two going forward. If we do, I might get into Netflix. (All charts were created by me, based on Netflix quarterly statements.)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.