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Netflix (NFLX) is a global video streaming service which offers a subscription for interested customers. Its main competitors include Amazon (AMZN) through Amazon Prime and Coinstar (CSTR).

Reasons to buy Netflix

  • Netflix has a large consumer base of around 25 million users and huge brand recognition. It is also growing rapidly. Over the last three years, its revenue growth has average 32.9%, more than three times as fast as the industry as a whole, while in the same time period its EPS growth has been 46.6%, almost twice the industry average.
  • Netflix is poised to benefit from the Paramount Epix deal which will provide it with stream access to many of the big blockbuster movies that it has been lacking up until now. Hits like The Hunger Games and The Avengers will start to appear as part of the service which is bound to give Netflix a large boost in sales. However, there is a caveat in so much as Amazon has also managed to secure a deal with Epix for its Prime service.
  • The company is also expanding its TV episodes portfolio. Breaking Bad and other popular TV series have started to appear on Netflix. This diversification of the portfolio is another positive step for the company as it seeks to attract more users.
  • Netflix's competitors either are struggling to compete with its positioning in the market or don't want to compete with Netflix. LoveFilm was the established and largest player in the UK until Netflix entered the market, now Netflix has surpassed LoveFilm in terms of market share. Apple's (AAPL) iTunes allows consumers to rent or buy a movie but does not provide an everything in one package approach. Therefore, it does not occupy the same segment of the market as Netflix. Amazon Prime is nowhere close to being on par with Netflix. It is not growing fast enough and costs significantly more than Netflix to use. Also, many devices have not yet embraced Amazon Prime the way they have Netflix. Neither Android devices nor Apple devices support Amazon Prime yet although this might change in the future. Coinstar is perhaps the only one of its competitors that offers Netflix strong competition and it offers this through kiosks rather than online. Coinstar has also struggled to raise its prices, the last time it did resulted in a massive shareholder departure tanking the share price.

Reasons to sell Netflix

  • Netflix is facing a slowdown in subscriber growth in the US as well as higher content costs. It also appears to provide a service that is easily duplicated. However, recent attempts by competitors to enter the market have shown that Netflix's streaming model is harder to replicate than it initially seems. Netflix has fairly high fixed costs which means there are strong barriers to entry.
  • Amazon Prime might grow into a dangerous challenger to Netflix's position as the market leader. Amazon has significant resources to devote to this target and it is not too much of a leap that it could succeed. However, Prime as of yet has not become a large revenue stream for Amazon which shows that consumers are reluctant to switch. It's also not clear whether Prime could offer a better service than Netflix. Certainly, over the short term and foreseeable long term, this will not be the cast.
  • Any real profitability in Latin America might well take a long time to show, perhaps even up to five years. In the big Latin American countries such as Mexico and Brazil, the existing pay-TV companies have a very concentrated presence meaning it will be hard for Netflix to establish a large position in them over the short term.
  • Netflix currently has unlimited broadband streaming deals and its costs could go through the roof if these deals change. If they are charged relative to bandwidth than it would be much worse for the company. However, the more likely result is that broadband providers will just increase the price of the package as they value Netflix highly as a customer and so will not want to run the risk of losing it.

What is Netflix's fair value?

A discounted cash flow analysis of Netflix reveals a 69% cash flow potential with a price of $113 per share. A comparative multiple analysis gives a multiple potential of 167% resulting in a price of $178 per share. Lastly a Buffett Intrinsic Value Analysis shows a Buffett potential of 217% with a target price of $208 per share. If these measures are given a weighting of 70%, 20%, and 10% respectively, we obtain a target price of $135.6 per share, a potential change of 103.2% (here).

Consequently

Therefore, Netflix should definitely not just be written off. It was clearly overvalued when it was around $300 per share. However, at $65.00 per share I believe it is an attractive option for investors with possibly a 50% upside, valuing it at a conservative $100 per share (off the valuation above of $135.6). Nonetheless, because Netflix's price is so volatile, I'm sure many investors will not go near Netflix until it settles down.

I realize that many investors think Netflix is a toxic stock but please keep your comments civil. I have tried to present a balanced view and I would be happy to add any information that I have missed out.

Source: Is Netflix Really The Disaster Everyone Thinks It Is?