I'm going to start off by saying that as a product, I love Netflix (NASDAQ:NFLX). From its simplicity to its low price, I think that it is a great product that many consumers benefit from. But as a business, I don't think that Netflix is worth as much as it may seem. It will never be worth tens of billions of dollars again. As of the time of writing of this article, Netflix is worth $3.36B. I think that this is a fair valuation for Netflix, and is, if anything, still a bit inflated.
How Much Is Netflix Worth?
If I were investing in Netflix, I would do so solely for its streaming business. In addition, I would set a realistic expectation that the profitability of this online business would be almost fully concentrated in the United States for the next couple of years. In addition, as that online streaming is set to become an extremely competitive space, it is evident that investing in Netflix is very risky: larger competitors like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN) could damage Netflix heavily if they were to offer similar unlimited streaming service with wide libraries of content. Because of this risk, I would only invest if there were a potential for huge gains. Therefore, I built a quick model focused on its US streaming to try to predict how much the unit could be worth in the coming years.
The model shows that Netflix already has a large percentage of US households as subscribers. With the competition that is present and upcoming, it is hard to imagine that this share will grow, but in order to be conservative with my pessimism, I still set it at a 7% yearly growth in share. In the chart, blue represents inputs, while the rest are calculations from these inputs. The conclusion is that, unless something dramatic changes that completely redefines content costs for streaming companies, even with solid growth, Netflix's bottom line will not justify share prices of $60 or above, as Netflix's biggest prospect, its US streaming business, does not even come close to this valuation (international streaming is not profitable), as can be seen at various P/E levels.
While I do believe that Neflix is a viable business, its bottom-line potential does not justify even its current valuation, which is considered by some to be low, especially in comparison to its historical value. With the risk involved in investing in a company in transition such as Netflix in such a competitive space as content streaming, only a stock with the potential to bring huge returns would be worth an investment. From my analysis, it is clear that Netflix does not have the potential to return to a $300, a $100, or even a $80 valuation, and therefore it is not its trouble.
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.