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Why Netflix Inc Will be a $100 Billion Company (One Day)
Netflix's Current Situation Year-to-date, Netflix shares are up over 130%, primarily due to better-than-expected subscriber growth. It’s also the best-performing stock in the S&P 500, and its market cap is already approaching $50 billion, up from near $20 billion at the start of the year 2015 has been a special year
Why a $100 billion valuation is within reach Subscriber growth Improving profitability The company is disrupting a huge industry. Let’s take a look at each of these factors. 3 big reasons why the stock could double
Subscriber Growth Total subscribers grew to 65.6 million last quarter (42.3 domestic and 23.3 million international). Membership is up more than 30% from a year ago, and is re-accelerating domestically, which management attributes to an improved slate of original programming. Netflix membership is soaring
Subscriber Growth Meanwhile, international growth is getting better each year: Note: 2016 figures are projected: Source: Netflix
Subscriber Growth As you can see from the chart, international subscriber growth has improved each year and is set to approach 30 million by the end of 2015. Continued expansion next year should ensure accelerated growth. Meanwhile, domestic growth has been stable, indicating the company is far from maturing. Management expect to reach 60 to 90 million domestic subscribers.
Improving profitability The company’s subscriber-based model means that each subsequent sign-up increased profitability because revenue is increasing on the same base of costs. Management has outlined a goal of 40% domestic contribution margin by 2020. The power of Netflix’s business model
Improving Profitability Source: Netflix
Improving Profitability The key metric jumped five percentage points in the last two quarters. At the current growth rate, the company will hit its 40% target by next year - four years early. Domestic Contribution Margin is re-accelerating
Size of the market is huge Netflix is leading the disruption of a home entertainment industry worth of hundreds of billions of dollars. Comcast, the leading U.S. cable provider, alone is worth $160 billion alon
Size of the market is huge On the recent earnings call, CEO Reed Hastings said that the number of people who are, “ "video entertainment, watch some TV and have enough money to pay for a service, that's a very large potential market."
Not only is the opportunity there A 40% contribution margin with 60 million domestic household at an average selling price of $120/year, which assumes in slight increase fees, would yield close to $3 billion in profit. Assuming $1.5 billion in other expenses, a 50% increase from today, Netflix would have $1.5 billion in domestic streaming operating income. The profits are too
How it adds up Factoring in a tax rate of 33% would give the company $1 billion in net income from that segment. Based on the upper limit of 90 million domestic subs, Netflix would have $2 billion in net income. That does not include income from DVD-by-mail or international streaming.
How it adds up With $1 to $2 billion in net income from domestic streaming, Netflix’s P/E would be at most 100 at a $100 billion valuation. That seems like a modest figure given the huge market opportunity and the contributions from international streaming, which will likely bring in more subscribers than domestic.
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