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Nitin Gulati
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As a value driven investor, my investment approach is safe and cheap. I focus on investing in companies with extremely strong financial positions offering future growth at a discount. I take that same top-down approach and apply a synthesis of market implied growth rates in securities to isolate... More
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  • Is Netflix offering a fair value proposition to its shareholders 0 comments
    Nov 16, 2010 10:28 PM | about stocks: NFLX


    Human beings enjoy entertainment in any form, but movie media, TV shows make up for the majority of entertainment content, we use to entertain ourselves. From the industry reports, average American consumed (don’t know why it’s consumed rather than enjoyed) 158 hours of TV in home, 25 hrs on internet and 3 hours on mobile video. Continued adaptation to internet revolution by mainstream consumer is dynamically shifting consumer habits, thereby forcing companies to adapt to changing level field as quickly as possible.

    Netflix, operating in the subscription segment of entertainment video market has significantly expanded beyond DVD-by-mail distribution and is rapidly growing into streaming content provider. In an entertainment industry facing saturation, studios, content providers are realigning their investments, business models to increase their leverage in traditional and emerging platforms. It definitely puts streaming content companies as NFLX in a strategically advantageous position, which is capitalizing on increased fragmentation of traditional TV audience.

     

    Netflix’s business model aligns extremely well with consumer requirement for media content –economic and convenient delivery. Build up in subscriber base by engaging consumers with a low cost subscription fees has fueled growth for NFLX in the past 5 years.  Total number of subsribers has grown at a rate of 31 % over the last 5 years where as revenue has increased by almost 18 % annually. Sales growth has been 26 % on an annualized basis over the past 5 yrs whereas net income has grown 36 % in the same period.  In the last 3 years NFLX rewarded its stock holders with an annualized return of 92 % compared to -5.3% returns by S&P.  

     

    Presently stock is trading at multiple of 66 compared against industry average of 41.  This reflects high growth potential expected from NFLX.  Will NFLX be able deliver on those high growth expectations to its shareholders?

     

     

    Compelling proposition initiative of enrolling once and watching anywhere has been gaining popularity among internet addicted consumers of this age. Launch of digital video locker - single industry open standard will provide the ability to play media content across multiple formats. Such technological advancements will provide the boost required by companies such as Netflix to gain more subscribers. How well these developments are integrated in their steaming content management systems still remains a question for investors, as NFLX evolves more toward content streaming.

     

    How reasonable investor expectations are from this company. Industry reports suggest digital distribution will sustain continued growth in near future before stabilizing. Gen Y consumers with relatively more discretionary income and increased need/want towards technology gadgets, smart phones, portable electronics can be expected to build up NFLX subscriber base in near future. Subscriber base can only grow over a short term period before it hits the ceiling. Over time, NFLX will face challenges from competition, content acquisition expenses, marketing expenses. Improvement in margins, reduction in bottom line costs can help the management delivering on street expectations.  Company expects to break even on their investment in Canada by mid next year and expectations for robust growth in Canada are already factored in. It becomes quite imperative for management to pursue further growth avenues considering they have only one product offering across the board.

     

     

    Disclosure: No Positions as of now, will initiate short positions soon
    Themes: Entertainment Stocks: NFLX
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