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Netflix: What If It Hits 375 Million Subscribers?

Apr. 12, 2018 10:14 AM ETNetflix, Inc. (NFLX)29 Comments
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  • Several analysts are touting that Netflix will gain substantial international subscribers.
  • Netflix has the potential to hit 300 million international subscribers by 2028, notes Morgan Stanley.
  • Simplistic relative valuation will make you believe that Netflix is cheap.
  • However, detailed valuation reveals that the stock is priced for perfection.

As Netflix (NASDAQ:NFLX) is closing in on its first earnings of the year, analysts have started to weigh-in on the company’s outlook. Both Morgan Stanley and JP Morgan have raised their price target for Netflix amid prospective international growth. Goldman Sachs is also painting a rosy picture as far as the results of the quarter are concerned. Netflix is expected to report the earnings of its first quarter on April 16.

Analysts at Morgan Stanley think that Netflix will benefit from the growth in international markets; they raised their price target to $300. JP Morgan is even more bullish with a new price target of $328, an upside of ~8% to the Wednesday’s close price. Goldman is ahead of the pack with a $360 price tag on Netflix; they also cite global scale benefits among the reasons for their price target. The theme around analyst report is common, global reach and network of Netflix. However, there is one particular problem for Netflix – content costs.

Netflix’s business entails very high variable costs.

The content-intensive nature of the business makes us skeptic about the future earnings potential of Netflix. The company is expected to spend $7.5 billion-$8 billion on content during the current year. To put it in perspective, revenue forecast for the year stands at $15.9 billion; the company is practically spending half of its revenue on content.

However, the growth of revenue has started to surpass the growth in cost of sales. See the chart below:

Source: NFLX shareholders’ letter 2017

The company managed to pull down its cost of revenue by 200 basis points during 2017. Nonetheless, the cost of revenue is very high in absolute terms, given the sky-high valuation of Netflix.

The problem of content acquisition is not going away.

The problem with the content acquisition

This article was written by

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This publication is for informational purpose only and reflects the opinion of Focus Equity’s analysts. This opinion doesn’t constitute a professional investment advice. Our senior technology analyst, Soid Ahmad, compiled this research piece. Focus Equity is a team of analysts that strives to provide investment ideas to the U.S. equity investors.

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