Netflix's (NASDAQ:NFLX) stock is currently trading at around $440, which is significantly ahead of our price estimate. The stock has fluctuated a lot over the years, primarily based on how subscriber additions have trended. So what justifies the current market pricing? We believe that Netflix will need to grow its global streaming subscriber base to 110 million, increase its average monthly revenue per subscriber to $10 and boost its streaming contribution margins to 40% over the course of the next six years in order to justify its market valuation.
Our $281 price estimate for Netflix stands at a discount of about 35% to the market.
+$80 To Price Estimate: Average Monthly Fee Per Subscriber Increases To $10
Netflix recently raised the monthly price for its streaming service in the U.S. by $1 and made a similar adjustment to its international streaming plans as well. The increased pricing will apply only to new customers whereas current subscribers will continue to pay the same price for two years. Our analysis shows that Netflix can add roughly $500 million in annual incremental revenues in the U.S. alone by 2017 with this move. This will help it support its margins, which may come under threat from rising content costs. However, that won't be enough to justify the lofty market valuation. We believe that Netflix will need to increase its pricing further, such that the average monthly revenue per subscriber approaches $10 for both the domestic and international operations. This will add roughly $80 to our price estimate. We currently forecast the figures to approach $8.50 and $8.25, respectively, by the end of our forecast period.
+$50 To Price Estimate: Worldwide Streaming Subscriber Base Grows To 110 Million
We currently forecast Netflix's domestic streaming subscriber base to grow to 55 million by the end of our forecast period. Additionally, we expect the number of international subscribers to reach close to 40 million during the same time frame. This puts the expected global streaming subscriber count at roughly 95 million. However, if this figure goes up to 110 million (60 million in the U.S. and 50 million internationally), it can add another $50 to our current price estimate. Netflix is expanding rapidly overseas, but it will need to ward off any local competition or attempts by local TV service providers to expand their own streaming services.
+$40 To Price Estimate: Contribution Margins Rise To 40%
We currently forecast contribution margins for the domestic and international segments to increase to 37% and 33%, respectively, by the end of our forecast period. However, to justify the current market valuation, Netflix will need to grow these margins to around 40% for both the segments over the course of the next five to six years. This will add another $40 to our current price estimate. This is plausible if the above discussed scenarios around the fee per subscriber and number of subscribers play out.
Disclosure: No positions.