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A recent study by Convergence Consulting Group indicates that the phenomenon of cord cutting picked up significantly in 2010. “Cord cutting” refers to the trend of cable subscribers cutting their cable service in favor of watching TV programs online. After an estimated 550,000 homes terminated their pay-TV service in 2009, the figure increased to about 1 million in 2010. [1] So is Netflix (NASDAQ:NFLX) really one of the factors influencing this change as the study suggests? To some extent, probably, given Netflix’s low-cost proposition. That’s good news for Netflix as the company stands to gain from continued cord cutting.

Although Netflix’s business model is unique, it still competes with Apple’s (NASDAQ:AAPL) iTunes, Hulu, VoD services from pay-TV providers like Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC) and others.

While Netflix does not offer TV-shows that are running live on networks, the platform’s advantage comes from its low subscription costs. Consumers that tend to watch a few, select TV shows might find Netflix’s streaming selection to be more than sufficient, and opt to toss aside their pay-TV bills. Does that mean huge upside for Netflix as cord cutting gains momentum?

Not so fast. A good chunk of the value-conscious consumers that might opt to avoid cable bills in return for a more limited viewing selection have probably already done so. Accordingly, we remain cautious regarding expectations for substantial growth in cord cutting and, consequently, substantial upside to Netflix. If Netflix is more of a beneficiary than a cause for this trend, then the upside to Netflix subscriber growth could be muted.

Chart created using Trefis' app

Our price estimate for Netflix stands at $119, a substantial discount to market price.


Notes:

  1. Millions ditch cable for Netflix and antennas, TG Daily, Apr 11 2011

Disclosure: No positions

Source: Cord Cutting Continues, But Be Cautious on Netflix Upside