Why Netflix Makes Sense at $100

By Trefis.com

NEW YORK (TheStreet) -- Netflix(NFLX), an online movie rental company, currently has a subscriber base of close to 14 million. The company's stock, which has increased from $86 to over $100 in the past week, depends significantly on the number of subscribers in the long term. Our current Trefis price estimate of $82 for Netflix's stock is hinged on our projection of Netflix subscribers over time as shown in the chart below.

You can modify the chart to see how Netflix's stock depends on how the company's subscriber base trends.

Based on our analysis of Netflix, we have sensitized our Trefis price estimate to various subscriber count scenarios and summarized the results in the table below. The current market price of about $103 for Netflix implies that, all other things being equal, Netflix will have about 45 million subscribers by the end of our forecast period.

You can see from the table below that the Trefis price estimate for Netflix would be $50 if the company were unable to grow beyond 20 million subscribers (currently they have about 14 million). Furthermore, the stock could reach about $180 (80% upside to current market price) if subscriber count were to reach 80 million.

Below we highlight factors that could cause Netflix to fall short of the 45 million subscribers implied by the current market price of $103, as well as factors that could cause it to exceed that target.

Falling Short of 45 Million Subscribers

(1) Rental Kiosks Remain Prevalent and Popular

Netflix faces competition from DVD rental kiosks which have been growing in popularity. Many kiosks are located in grocery stores which make it convenient for renters to pick-up and return films. Although kiosks are under a long-term threat from the shift to streamed content, the prevalence of DVD rentals may persist longer than we anticipate and reduce the number of new subscribers that Netflix can win among DVD kiosk customers.

(2) Pay-TV Providers Enter the Online Streaming Marketing

Pay-TV services from companies like Comcast(CMCSA) and Time Warner Cable(TWC) include video-on-demand for digital subscribers. These companies are increasingly looking to deliver content by streaming it over the internet. Comcast's Fancast platform is one example of the potential long-term threat to Netflix's online streaming business.