fbpx

How Much Can Netflix Make?

Netflix (NFLX) jumped nearly $100 per share after it reported first quarter earnings. All of this despite the fact the company missed the 71 cent earnings estimate by 33 cents, and had a profit decline of 56%. With a P/E of 334 the stock’s high, but keeps going higher. I think the reason is what the potential for Netflix is — as in how much it can make.

Right now NFLX is spending to expand into different countries. Acquiring local content (i.e., movies from the native country), paying cable providers to stream the movies, adding administrative personnel, pumping up the marketing. So when this is all said and done and NFLX is “mature” how much profit will it make? Here’s my analysis:

One Year Chart

NFLX_2015_Q2

NFLX currently has 40 million domestic (paying) subscribers, who pay an average of $8.14 a month, or $97.68 a year. International subscribers are 20 million at $7.17 a month/$86.04 a year. It also has 5 million DVD subscribers, at $10.55 a mo/$126.60 a yr, but that subscriber number is down from around $7.5 million a couple of years ago, and for the sake of this argument, let’s just guess this business eventually goes away as DVDs go the way of the VCRs.

Netflix can get to 150 million subscribers wordwide. America is a mature market, the 40 million subs could grow into 50 million. Internationally the 20 million subscribers could be 100 million someday, giving us a total of 150 million. Here’s the revenue projection:

Domestic Revenue: $4.88 billion (50 million x $97.68)
International Revenue: 8.60 billion (100 mill x $86.04)
Total Revenue: $13.48 billion a year (let’s round to $13.5 billion)

Now comes the tricky part. What are Netflix’s costs? Going into how much a production company gets paid per movie, sometimes per view, adding in costs to the cable company per view (maybe 5 cents a view) is a huge undertaking and honestly Netflix doesn’t want to give you some of this information for competitive reasons (and it doesn’t have to). So instead of going the long way, let’s just take the easy road and use 60% as cost of content. America is at around 60% now and International costs for content are 90% now, but could approach America in the long run (Canada is NFLX’s second market and has already gotten to America’s margin). Below are what I guesstimate NFLX’s expenses — and ultimately profit — could be, using other percentages from NFLX’s Income Statement:

$13.5 billion, Revenue
-8.1 billion, Cost of Revenue (60%)
-1.4 billion, Marketing (10%, <10% in the US & >10% abroad)
-1.2 billion, Technology (9%)
-0.7 billion, Administrative Costs (5%)
$2.1 billion Gross Profit or $1.5 billion after taxes

$1.5 billion in earnings/60 million shares outstanding = $25 in profits in earnings per share (EPS). 

Fair Value

NFLX_2015_Q2_FVThe Fair Value table to the right is not giving you a correct reading because NFLX is spending to grow and would really make a lot more than the $1.68 estimated for this year if it wasn’t blowing through money to grow overseas.

The $25 I’m assuming in future profits for Netflix is when it is for a more mature company, so a 75 P/E would is too high. 30 times earnings would be more reasonable, and $25 x 30 = $750 stock. Someday. Possibly.

Sharek’s Take

Netflix is king of content and is taking over the world. $750 is what I feel the stock can go to, but how long will that take and what’s your return — per year. With the stock at $560 today that leaves us 34% upside to $750. In the meantime the company has to grow from 60 million subscribers to 150 million, which could take five-to-ten years. Therefore I feel this is a great franchise to own — if you can get it at a better price. NFLX was $350 around the beginning of the year and although that price is long-gone a gain of $350 to $750 isn’t bad over 5+ years. $560 to $750 isn’t worth our time or risk.

For now its best to let NFLX run if you don’t already own it, and wait for a market correction or a bad quarter from Netflix before you invest.

View the Earnings Table here.
View the Profit History here.
View the Ten Year Chart here.

Leave a Comment

Your email address will not be published. Required fields are marked *

Not a member? Sign up here for $25 a month.