What Does Netflix's Current Stock Price Imply?

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Since its last earnings announcement, Netflix’s stock has fallen significantly and is trading at around $70 currently. As we break down our price estimate for Netflix into different segments that are driven by fundamental business drivers, we provide a unique ability for investors to gauge the business expectations at the current market price.

With that in mind, let us try to understand what the market may be expecting at the stock’s current price. 

[/entity]See our complete analysis for Netflix

We start by identifying the key drivers that drive Netflix’s stock fundamentally. These include the number of U.S. streaming subscribers, the number of international streaming subscribers and Netflix’s content acquisition costs. Even the stock has traded primarily on subscriber count and content cost concerns. We ignore DVD subscribers here as we believe that the market is fairly certain that they are will decline, and we have priced them accordingly in our estimates as well.

We further assume that the current price reflects the difference in the market’s expectation against ours, for each of the business drivers above. One of the possible scenarios that could justify the current market price involves the following:

  • Netflix is only able to reach 30 million streaming subscribers in the U.S. in the next 6-7 years, well below our current expectations.
  • Netflix is able to reach an international subscriber base of about 15 million over the same period as above.
  • The content costs rise from the current level of about 43% (which is quite high and a significant increase over the last year) to 50% by the end of our forecast period.

Given the above, do you think the market’s expectations are justified? Can Netflix do better than this?

A lot depends on the competitors that certainly have deep pockets and the capacity to slow down Netflix’s expansion. However, the company’s ability to rebound from the subscriber backlash last year shows that it has what it takes to keep going.

Our current price estimate for Netflix stands at $110, implying a discount of little over 50% to the market price.

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