Our view on Netflix valuation

We value Netflix at 200$ a share fair value

Netflix is an important company. It encompasses a few large trends and hence serves as a case study for valuation. We don’t have a position.

Trends

  1. Internet TV
  2. Subscription based video on demand
  3. No ads
  4. AI for content discovery
  5. Software development for multiple viewing devices and occasions (such as home, car, train, Starbucks etc.)

These are difficult problems to solve and Netflix is at the forefront. Hence the importance.

Here are our thoughts on valuation:

We use a media approach. Netflix is a media company and thus should be valued as such. The proxy is Disney.

Today Disney trades at 3 times sales and 10 times Ebitda.

We use 2025 for Netflix to get to steady state and therefore expect the market to treat Netflix in 2025 similarly like it treats Disney today. We still use higher multiples for Netflix in 2025 to reflect the software side of the business wich is much more important for NFLX than for DIS.

Valuation

Subs are expected to grow from 100 Mio. today to 215 Mio. in 2025, representing a 10% CAGR.

Monthly ASP is expected to grow from 10$ today to 14$, representing a 5% CAGR.

Revenue is expected to be 38 Bio. $

Content cost are expected to grow 5% CAGR to 15 Bio. $.

The rest of cost are expected to grow 5% CAGR to 6 Bio$.

Ebitda is 38–15–6=17 Bio $.

We give Netflix a 12 times Ebitda in 2025, which is 204 Bio. of EV.

No Net debt expected, so Market Cap equals EV = 204 Bio.$

We use a 11% Discount rate, which gives us a PV of 86 Bio. $, that is around 200$ per share.

In this scenario we assume continuous growth, nothing dramatic. There is more upside if you believe they can grow subs much faster. For example, they could succeed in India or China and add massively new subs. We discount that probability.

Risk

The biggest risk in the Netflix business model is that they have to continue producing shows and movies to stay relevant. It is possible that there could be saturation. Also, competition and cost inflation is a risk but we don’t see that as material. We assume only 5% content cost inflation because we assume Netflix has hit escape velocity and can grow subs with a steady state of content investments. They don’t have to reinvent the wheel anymore in content, just keep doing what their doing and hence cost should grow more moderately than revenue. This is a big assumption and could go wrong. We view saturation as most important risk. As a customer of Netflix we feel there is some repetition and cookie cutter approach to shows. This could become more prevalent and Netflix could suffer from that.

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