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The Potential Market For Netflix And Its Valuation

Apr. 03, 2018 4:52 PM ETNetflix, Inc. (NFLX)DIS39 Comments
Wubbe Bos profile picture
Wubbe Bos


  • The potential market for Netflix is bigger than it is now but might be smaller than most might think.
  • The US media market is far bigger, more developed, more expensive and more profitable than the rest of the world.
  • Netflix lacks synergies in their content since it only has one platform of using it.
  • Netflix is still a fairly small company with a small content library for its valuation.


Investors in Netflix (NASDAQ:NFLX) have seen the value of their stock holdings increase to a the level where its market cap is closing in on Disney (DIS). Netflix has delivered great results and growth in 2017. The important question though is how large Netflix can become to value it correctly, given that size makes it more difficult to grow fast and markets at some point are saturated with certain products.


Netflix is the dominant OTT platform for watching series and movies with currently 111M paying customers at the end of 2017 and a market cap of $122B. 53M customers are living in the US while 58M customers are in international markets. The US and international markets are in different stages of development and are therefore analyzed separately.

US Markets

The US Market is the homebase of Netflix. It is the market in which it has its strongest position and already reached profitability. The US market still saw good growth for Netflix during the year, increasing customers from 48M to 53M.

Assuming customer growth continues at 5M in the US for another five years would result in an increase of roughly 50% in customers to 78M. After this growth, it is likely that growth will level off because people are sharing accounts and the US has only 126M households. Combined with this growth in customers, revenue is in my view likely to double to $12.3B. While price increases might help competitors become more competitive, it's needed to fund new content and compensate for inflation. Currently, the profitability of Netflix's entire operation is only $560M. But given that the international operations are still unprofitable, when other operating expenses for infrastructure, AWS from Amazon (AMZN), and general plus administrative expenses are equally distributed, the current profitability in the USS might

This article was written by

Wubbe Bos profile picture
Dutch investor. Interested in international investing opportunities. Experience writing for Dutch investment magazine BeleggersBelangen.nl and Dutch IB broker lynx.nlCurrently working for the worlds most sustainable bank.

Analyst’s Disclosure: I/we 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.

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Comments (39)

Basit Saliu profile picture
after watching coco and even shedding tears I think Disney will be the company's threat and Netflix getting acquired in few years. Disney will be a duopoly in distribution and content after AT&T.
Wubbe Bos profile picture
Netflix tech blog is an independent source?
Since when is tech a durable competitive advantage?
Ask Google. Who's stopping NYT and WaPo to start a search engine?
Hollywood gets 2/3 of box office overseas. Youtube gets 80%-90% of revenue from overseas. Netflix will also get 80% or more revenue overseas, as current trajectory suggests.

Margin rate should be comparable. While ARPU is lower abroad, content cost and marketing cost should be lower too.

So instead of $5B profit, you may be looking at 25-30B profit in 10 years, and a 1T company at that time.
Wubbe Bos profile picture
Even if you assume it can reach $30B in steady state it should not be worth $1T. If it reaches $30B in annual profit I would value it at maximum $600B but more likely at $450B.

Netflix does not really has any strong competitive advantage, has negative cash flow and is diluting shareholders while increasing debt levels. Why do you think that strong competitors like Disney, Comcast, Amazon, Tencent, Apple and Google will give this juicy $30B annually to Netflix?
LOL. You can give Disney 10 years and it won't be able to match Netflix on tech. The companies you mentioned can't touch Netflix, that's why.
Wubbe Bos profile picture
I guess that's what makes a market... personally I don't think the tech of Netflix is very special. In addition they rent most of their infrastructure.
Netflix is highly overrated.
Lone Wolf Capital profile picture
Been adding DIS on this correction. It’s too damn cheap. Would only consider NFLX under 100.
Wubbe Bos profile picture
I don't know if Disney is too damn cheap. Profits at ESPN and other cable TV assets could decrease in value due to increased competition.
Cambridge STR profile picture
How about a vertical market equivalent of Netflix? One for law enforcement to store videos from police body cameras? Check out Axon's evidence.com service. AAXN is the ticker symbol.
‪🚨COMMON SENSE ALERT🚨 $DIS Black Panther Box Office Revenue Alone Is Roughly 50% Of $NFLX Quarterly Revenue. Netflix Barely Does $3B Revenue & Negative FCF😂 @WSJ @business @businessinsider @Reuters @latimes @nytimes @MarketWatch @Forbes @MorganStanley @jpmorgan ‬
I could not agree more.

Note that Bill Nygren bought the stock around $180 while NFLX is now trading at $280 ($334 before the recent pullback) which is equivalent to about 56% (86%) premium to the price Oakmark paid. Even if NFLX used to be a bargain it's clearly in bubble territory now .

The original argument Nygren made (NFLX is intentionally underearning and might be able to increase subscription fees without losing a significant amount of subscribers) might have been valid, but 10% subscriber growth still don't get you from $180 to a fair value of $280.

To put NFLX's size into perspective, DIS generates more operating income than NFLX has revenue, which means that NFLX would have to double revenue at zero additional costs to catch up with DIS. DIS could actually double NFLX's total spending and invest that in content but would still be more profitable than NFLX. That is not even accounting for the FOXA acquisition.

The concept that NFLX is able to capture the bulk of the global pay-tv market without any significant pushback from competitors might work as blue-sky scenario but is not a sensible assumption for prudent investors.
nerd_rage profile picture
Pushback won't push NFLX out of contention. At about $10/month, households can afford 2-3 services at the same time. So NFLX, AMZN and DIS could be those three services and live peaceably together. Consumers show a preference for big, broad libraries that appeal to the whole household - obviously, a better value than something narrow - so any wannabe competitor will have to ramp up wildly and establish itself globally while the market leaders are all doing the same.

I think we know at least three of the four or so eventual winners. I just said them. Hard to see anyone catching up unless they have something extraordinary like AAPL's war chest. They could flat-out buy their way in. But who else could try? CBS has the right idea but how much is Viacom really going to help them? What brands does Viacom have that anyone cares about? Comcast doesn't seem to know what's going on. Whoever ends up with HBO will have some nice brands but that could chance hands before this is all done.
Wubbe Bos profile picture
The problem is that in its current state Netflix is not as valuable. It has to increase prices or lower cost to grow earnings to a more normal multiple.
Wubbe Bos profile picture
It is true that those value investors bought in at lower prices. Would be interesting to see if they managed to take profits at the right time.

Still from my own (international) experience I think sharing Netflix accounts is quite common which means saturation might be closer than people expect. While the people actually valuing the service at its retail price might be lower.
Your analysis seems flawed on several counts. First, you assume that US penetration will saturate at only 62% of households? How can that be considered "saturation"? We're still in the early stages of "cord cutting" and as a result US Cable TV penetration has declined to 79% of US households (see http://bit.ly/2q1KAiq). There's no reason to believe that this decline will reverse, and in fact should accelerate as DIS and other entrants move to streaming. As a result, US streaming penetration should converge to the broadband penetration rate, which currently stands at 82% of households (see http://bit.ly/2Itv7if). True saturation will likely be close to 100% as streaming takes over entirely from broadcast and broadband Internet becomes near universal. Ultimately the Internet is the only game in town.

Second, it's not at all clear what your assumptions are for International subscriber growth, which should continue to see strong growth for many years to come. Again, the addressable market should converge on the global broadband penetration, which itself is asymptotic to cellular penetration as 5G rolls out since 5G means you'll have broadband anywhere you can get a cellular signal. That's a market sized in billions within your five year horizon, making hundreds of millions a modest target.

Finally, it appears you're making very modest assumptions about subscription pricing growth, essentially allowing it to "cover inflation". That's certainly not the curve Cable TV pricing followed during its rise, and streaming will be no different. As more and more content shifts to streaming, and traditional Cable TV implodes, expect streaming prices to reflect that shift. The end game is today's Cable TV subscribers in developed countries will be paying roughly the same as before, only for a combination of streaming services offering incomparably richer choices in a viewer-centric rather than advertiser-centric business model.
I'm not the author, but I'd suggest that there are more people sharing single nflx accounts than with traditional cable accounts ..from multiple addresses in the same family or from multiple units within the same building...also, unlike cable, nflx has a proportion of 'rotational' memberships where people rotate their binge watching between nflx, AMZN, HBOgo, etc. (e.g. 4 months each) by regularly switching subscriptions...
NFLX accounts are limited in the number of simultaneous streams they support. So if you want to share your account with others you'll quickly discover that you bump into this limit when you try to stream something. NFLX totally knows this and it's all factored into their business model.

Also "hop on, hop off" may affect those on extremely limited budgets but this sort of churn is also exaggerated. NFLX continues to be one of the most "affordable luxuries" on the planet and few penny-pinch to this degree.
Wubbe Bos profile picture
I think 62% of all households with a Netflix account is quite ambitious for the following reasons:
1: People are sharing accounts
2: Netflix does not have a monopoly on streaming services. It is not the case that all broadband or TV cable subscriptions are delivered by the same company.

My assumption on international is that it will reach the same profitability as Netflix reaches in its domestic market. This again is rather aggressive given the following facts:
1: Foreign governments spending on content
2: Foreign countries favoring domestic companies
3: Foreign countries having very different tastes
4: Foreign individuals spend significantly less on content

Cable TV companies had a monopoly in their specific region. This is and will not be the case for Netflix. This means competition would limit price increases and profitability.
I think the end game is that people in the US will start to pay less for content since they are better able to choose which services provide value to them.
Good Disney mention, you forgot to mention they own majority stake in Hulu (Dec 2017). I would also bring up the endless possbilities Pixar, Marvel, and LucasFilm brings them + existing international exposure of movies and parks + merchandising. DIS booting up their streaming services in 2019, already starting their ESPN subscription service this month.

I would implore anyone looking at buying into Netflix at their current ask to look at DIS and anyone already owning NFLX should buy some too. Possibly sell onces the DIS train starts rolling. I'm looking forward to some DIS growth, has been stagnant of late, but will keep it dripping and look to add more.
Wubbe Bos profile picture
Disney is definitely cheaper but I don't like the acquisition of FOX assets. The synergies though between content, parks and merchandise are great!
The aquisition for 21st Century Fox hasn't gone through yet but they need it to get majority stake in Hulu. It also brings alot of valuable movies, shows, and sports to be able to stream giving them a huge library. The Fox Searchlight and 20th Century Fox film libraries may be worth it alone for the award winning movies Searchlight produces and franchises of X-Men, Ice Age, The Simpsons, Alien, Fantastic Four, and even MASH!

Wubbe Bos profile picture
The assets are fine but I don't like the price too much.
watch the unsecured bonds...Tesla bonds are now down in the 80s, and nflx bonds have lost most of their coupon in the last week. There's no way they'll be able to go back to the capital markets with the same terms this time...will put pressure on those earnings going forward...shareholders are lowest on the totem pole
Siam Scat - you're right. That's the scariest part of Netflix the stock. They don't appear to be anywhere near being able to fund the growth of the business via actual cash flows.
jakefountain profile picture
Stock has declined because the market has and high flyers like NFLX, AMZN and TSLA are going to correct more than average. NLFX still up about 48% YTD I will take that. Next run up I may take a little off the table this appears to be a very violate year.
you've only taken it once you've taken it
Wubbe Bos profile picture
It can fall a lot more than you might expect. Be careful trading is not the same as investing.
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