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Alex Cho

Netflix is Not Down and Out

Netflix has gone through a sluggish year, as investors have curtailed expectations on growth given slowing penetration into international markets and two consecutive quarters whereby subscriber growth was below the analyst consensus.

Nonetheless the investment thesis over the long run remains appealing given the competitive advantage Netflix exhibits when compared to peers in the subscription streaming space. NFLX’s subscriber growth figures were negatively impacted by higher pricing, but upon the inclusion of grandfathered subscribers at the $9.99 pricing tier, I have greater conviction going into next quarter earnings results, as incremental pricing is the biggest driver to a potential top line beat.

Nonetheless the analyst (Michael Olson) at PiperJaffray surface a great point regarding fundamentals, as they’ve used a sum-of-the-parts analysis to arrive at an alternative valuation:

Based on this analysis, and assuming net debt position of $0 by 2020, we find a 2020 enterprise value of ~$80B; discounting back 3 years at 10%/yr points to a $122 value, in-line with the price target generated by our current valuation methodology.

I’ve been following PiperJaffray on their Netflix commentary for quite a while, and I believe their views seem fairly reasonable. After modelling my own growth estimates, I’m fairly certain Michael Olson’s comments are reasonable given ARPU, market expansion, and domestic DVD decline. While, it’s a bit convoluted to explain in the scope of an article, it’s worth noting that much of the concerns cited by investors are short-term headwinds.

Given enough time, I feel fairly compelled that NFLX will move higher on improving comps to analyst estimates. For now, patience is key as Netflix is not down and out.

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