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Summary

  • Netflix domestic DVD subscribers will decline by 20% between 2014 and 2030.
  • Domestic streaming subscribers will grow by 20% between 2014 and 2016, and 0% between 2016 and 2030.
  • International streaming subscribers will grow at a rate of 41% between 2014 and 2015, 35% between 2015 and 2020, and 25% between 2020 and 2030.
  • Netflix is currently fairly valued based on a very brief valuation using projected revenue.

Netflix (NASDAQ:NFLX) is an incredibly complex company to analyze as an investment; the dynamic nature of its business, the ever-changing competitive environment, and potential for rapid growth, makes a thorough analysis of Netflix impossible to fit in a single thousand-word article. Therefore, I decided to dissect this investment analysis into multiple articles. This first article will serve as a rough revenue forecast for Netflix between 2014 and 2030.

Domestic DVD subscribers forecast

In the future I believe domestic subscribers will continue canceling their memberships at a similar rate to the last few years. Therefore I have assigned a 20% loss rate per year for domestic DVD subscribers until 2030.

Domestic streaming subscribers forecast

Based on the company's guidance, conference calls, and notes in annual reports, it has suggested that it anticipates continued growth in its domestic streaming subscribers. I have assigned a subscriber growth rate of 20% between 2014 and 2016 based on the recent growth of the domestic subscriber base.

In my opinion, since Netflix allows three people access to one account, I believe this limits the realistic amount of subscribers it can obtain in the long run. Of course the U.S. population also limits this number. I project that there will be around 43 million domestic streaming subscribers by the end of 2016. This would mean that roughly half of the households in the United States have at least one subscriber. Based on its marketing efforts, and its current popularity, I believe roughly 43 million subscribers will be the level where domestic subscriber growth ceases. Therefore I have assigned a subscriber growth rate of 0% between 2016 and 2030.

International streaming subscribers forecast

Based on the company's guidance, conference calls, and notes in annual reports, management has suggested that it anticipates rapid growth in its international subscriber base. I tend to agree with the company's view that over the next few decades across the world, internet TV will replace linear TV and therefore I have assigned a substantial growth rate for the international streaming subscribers. First I examined the recent growth of its international subscriber base: over the last two years the international streaming subscriber base has risen at CAGR of 160%. The base grew 238% between 2011 and 2012 and 98% between 2012 and 2013. Assuming the growth rate will continue its rate of decline of 58%, the subscriber base will grow by 41% between 2014 and 2015. I will use this growth rate of 41% for 2014 through 2015.

With such a small amount of historical data on international subscriber growth, I will have to make a lot of assumptions to come up with projected growth rates.

Between 2015 and 2020, I believe the company will continue successfully expanding its international subscriber rate at a healthy rate of 35%. Between 2020 and 2030, I believe growth will wane to 25% per year as growth regions for expansion become scarce. This is a rough estimate; I do not have much data to support this estimate, however I believe it is still important to use a "best guess" forecast anyway.

*I created the graph above using my own subscriber growth rate forecasts for Netflix

The graph above shows the different growth rates I used for the three operating segments between 2014 and 2030.

(click to enlarge)

*I created the graph above with data calculated by me based on my forecast for Netflix

Now that I have a rough forecast of the number of subscribers between 2014 and 2030, I will forecast how much revenue Netflix will generate from each of its members, on average.

Here is data on how much revenue Netflix generated per subscriber in 2013:

*Graph above was created by me using data from the company's 10-K filed 02/03/2014

Now I will incorporate these values into my previous model to make a rough estimate of what Netflix' revenue might be over the next seventeen years:

*Graph above was created by me using data calculated by me based on my forecast for Netflix

For the sake of simplicity, I assumed that revenue per subscriber will increase by the rate of historical long-term inflation, roughly 3.3% (which I will use again later on) per year.

(click to enlarge)

*Graph above was created by me using data calculated by me based on my forecast for Netflix

The graph above shows projected revenue per subscriber and number of subscribers.

*Graph above was created by me using data calculated by me based on my forecast for Netflix

By multiplying the projected revenue per subscriber by the projected number of subscribers for each segment of each year, I came up with total annual projected revenue shown in the last column of the graph above.

(click to enlarge)

*Chart above was created by me using projected revenue data that I calculated above

My rough revenue projection for 2030 is $106.6 billion. To put this into perspective, I will discount that number back to present value using a discount rate of 3.33% per year (long-term 12 month trailing inflation rate between 1914 & 2013).

Abbreviated valuation based on revenue projections and loose valuation assumptions

The projected revenue discounted back to present value is roughly $61.5 billion. Below I will show some notable companies that generated around $60 billion of revenue in 2013. I will compare their current market capitalization and profit margin and use this to create a rough valuation of what level Netflix might trade at in the year 2030.

(click to enlarge)

*Graph created by me based on data from Yahoo Finance

Since this article is primarily intended to project the revenue of Netflix, not its earnings or profit margin, I will only give a quick, "ballpark" estimate of the relative value of shares of Netflix at their current price.

All I will say is that based on company statements, Netflix plans to have its international segment operate with a contribution margin comparable to its domestic streaming segment which was around 23% in 2013. Since contribution margin does not include "other expenses", fixed costs, or income taxes, the net profit margin of Netflix would have to be quite a bit less than 23% in 2030, especially since there are factors that may lower the company's margins in the future -I will not get into those in this article. To make a "ballpark" estimate, I will assume Netflix can operate with a 10% net profit margin in 2030. If that ends up being the case, Netflix in 2030 could be comparable to present-day Comcast which had revenue of $64 billion and net profit margin of 10.5% in 2013. Comcast's current market-cap is $133.87 billion. Assuming Netflix will generate revenue of $61.5 billion (present value), operate with a 10% profit margin in 2030 and be valued at a price-to-earnings ratio similar to present-day Comcast, its market cap would be around $122 billion and its share price would be around $2,000 per share (assuming no splits, dividends, share issuance or buybacks). If that is going to happen, Netflix shares will appreciate by an inflation-adjusted constant annual growth rate of around 9% between 2014 and 2030. Based on this quick, assumption-filled valuation, Netflix would seem like an attractive investment opportunity at its current price if the above valuation ends up being accurate.

Conclusion

Based on my very rough estimates of Netflix's future revenue, the company appears to be relatively fairly valued at its current price. However, the net profit margin estimates and the assumptions about how the company will be valued in 2030 need further analysis which I will provide in future articles. This article was only meant to be a "ball-park" examination of Netflix's future potential to generate revenue. This is by no means an investment recommendation, only a tool for analyzing the company. Once I have discussed all of the areas I plan to discuss in future articles, I will then offer a thorough investment recommendation for Netflix.

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.

Source: Netflix Revenue Forecast 2014 - 2030