Netflix Market Value Surpasses CBS Corp.

Is Netflix Worth $600 a Share?

Netflix Market Value Surpasses CBS Corp.
May 27, 2015

Since it was founded in 1997 as a DVD-by-mail rental service, Netflix has proven to be one of the most influential and dynamic companies ever launched. First, it took over the DVD rental market by pushing Blockbuster, which practically invented the industry, into bankruptcy.

Now it is at the forefront of changes that are altering how people all over the world watch TV. Netflix is probably the most recognized provider of streaming television content, which is becoming an increasingly popular way to access and view TV shows and movies. In fact, Netflix is now more widely watched than any cable TV channel.

Netflix also creates its own original programs, including the wildly popular House of Cards and Orange is the New Black and new series Unbreakable Kimmy Schmidt with Tina Fey, and Daredevil, which is based on a Marvel comic book. However, the company’s goals go far beyond just dominating the streaming content market. One industry analyst has said he believes Netflix is out to replace “linear TV” as we know it with on-demand, advertising-free programming.

A Stunning Stock Rally

It is within this context that we must ask whether Netflix is really worth its sky-high price of over $600 a share, which it surpassed on May 15. The Netflix rally this year has been stunning — Netflix (NFLX) shares were priced at under $325 in mid-January, so the stock has nearly doubled in price since the first of this year. For a historical perspective, consider that Netflix traded at $8.50 a share when the company first went public in 2002.

At its current price of $621 per share, the market value of Netflix exceeds that of CBS Corp. So is Netflix really worth more than the most watched broadcast TV network in the U.S.?

Not surprisingly, there are stock analysts who are on both sides of the Netflix fence. Netflix bulls point to such factors as:

  • It is looking more and more like content streaming could be the future model for most television consumption in the U.S. and worldwide — and Netflix is the clear leader here and the most recognized brand.

  • Netflix’s growing stable of original content and its extensive catalog of dozens of other TV shows makes the service invaluable for the increasing number of households that are cutting the cord and dropping cable TV.

  • Netflix has embarked on an aggressive international expansion plan. Its service is currently available in 50 overseas countries, including Australia and New Zealand, which were added in March after a big push into Europe last year. The company has said it plans to expand to a total of 200 countries by the end of 2016.

  • Netflix continues to enjoy healthy subscription growth domestically and internationally. In the first quarter of this year, it gained 4.9 million new subscribers, a new quarterly record for the company and significantly higher than its projected 4.05 million new subscribers. The total number of Netflix subscribers worldwide is now 62.3 million. Notably, more than half of the first quarter’s new subscribers, or 2.6 million, were overseas subscribers, who now number 20 million.

What the Netflix Bears Say

Of course, there are also some Netflix bears out there who do not believe that the company’s strong recent run is sustainable. They point to such factors as:

  • The margins for Netflix’s streaming content service are significantly lower than the margins for its traditional DVD delivery service. Netflix enjoys a healthy 52 percent profit margin on DVD rentals by mail, but only 11 percent on streaming video.

  • Netflix’s customers are highly price sensitive, which severely limits the company’s ability to boost the profitability of its streaming service by raising prices. In 2011, when Netflix tried to change its pricing model in a way that increased prices for customers who wanted both DVD rentals by mail and streaming content, customers revolted and the stock plunged 75 percent in three months. Netflix did increase the price of its streaming service a year ago by one dollar a month for new customers, telling existing customers they were exempt from the price increase for two years.

  • Netflix is expensive from a valuation standpoint. At its current price of over $600 per share, Netflix has a P/E ratio of 160.5. In comparison, the P/E ratio for the S&P 500 is currently 19.1, Google Inc.’s (GOOG) P/E ratio is 26.7 and Apple Inc.’s (AAPL) P/E ratio is just 16.1. The StarMine intrinsic valuation model projects that Netflix should be priced at around $77 per share with five-year profit growth of 10.7 percent.

  • Netflix is still not a very profitable company. Earnings during the first quarter of this year came in at just 38 cents per share, well below analysts’ expectations of 69 cents per share. The company blamed the miss on an unfavorable currency exchange rate environment, but the fact remains that Netflix’s content acquisition costs are very high. When combined with the price sensitivity of its customers, this makes some analysts nervous the company’s ability to meet profit objectives consistently any time soon.

A Disruptive Innovator?

Margins and P/E ratios aside, perhaps the biggest question to ask when trying to decide whether Netflix is worth $600 or more per share is this: Is Netflix a once-in-a-generation innovator in the vein of Apple or Google?

A recent column on argued that as a “disruptive innovator,” Netflix is indeed worth its current lofty valuation. The columnist noted that stock analysts do not know how to value disruptive innovators because they focus on historical numbers and project these forward. This makes them skeptical of companies like Netflix, Apple and Google that challenge the old business models and ways of thinking.

However, as such companies continue to prove the doubters wrong, the analysts keep changing their assumptions about them — generally recommending that investors stay away from the stock. Many analysts predicted Blockbuster would squash Netflix, but the opposite happened. Analysts then predicted that Netflix would cannibalize its core DVD rental business with its streaming service, and that Amazon’s streaming service would leave Netflix in the dust — wrong and wrong again.

“Investors should own Netflix because the company’s leadership, including CEO Reed Hastings, are great at disruptive innovation,” the columnist concludes. “They identify unmet customer needs and then fulfill those needs.”

Only time will tell if Netflix is as good to investors in the years to come as Apple has been to its investors in recent years. Yes, Netflix is very expensive — but it might well be worth it.

Photo © Krow

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