The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.



) --



(NFLX) - Get Report

stock currently stands around $80, a significant drop from where it used to be before earnings, and a huge decline from where it used to be few months back. What does this really mean for business in terms of fundamentals?

Based on our valuation, the current market price for Netflix's stock implies an effective halt in U.S. subscriber base expansion, no significant pickup in international subscriber additions and a significant rise in content acquisition costs. We don't believe this bearish scenario will ultimately unfold as the company is investing heavily in its international expansion as well in improving its content library. Whatever the case, we believe that Netflix's rivals such as


(AMZN) - Get Report


Dish Network


(DISH) - Get Report

Blockbuster could benefit significantly during this time of pessimism on Netflix's stock and service.

Our revised price estimate of $142 implies a premium of about 80% to the market price.

See our full analysis for Netflix.

Below we detail the bearish scenario that would justify its current market price.

U.S. Subscriber Growth Stalls

Is this a possibility? We don't think so despite the recent decline in subscribers as the current market sentiment reflects the extreme backlash regarding the price hikes, and the investor belief that Netflix's growth is over.

If Netflix's subscriber growth in the U.S. were to halt, it would imply that the damage to the brand is irreparable and increasing the content library will no longer attract customers to the company's streaming or DVD services. It would also imply that the competitors will bolster their services to such an extent that they will become viable alternatives to Netflix. We believe this scenario is a far cry from the current position of its business.

International Subscriber Additions Stay Low

We think that the current market price for Netflix's stock also indicates that international subscriber growth will not be able to fill the void that has been created domestically. Netflix has expanded to Canada and Latin America and next year, it plans to launch its services in the U.K. Despite this, we think that the investors expect that the subscriber additions internationally will not accelerate.

Content Costs Remain High

A lack of domestic growth and the failure to generate growth internationally still alone do not justify the current market prices according to our modifiable model. So the market is implying that content costs will eat away the remainder of this value.

While subscriber growth has received the most attention, investors and analysts have long speculated that the rising content acquisition costs for Netflix will hamper its growth. We have already incorporated a significant increase in the future, and we believe the market is pricing rising costs in excess of the expected uptick in 2012 due to the U.K. expansion and increased efforts to bolster its domestic library.

Do such expectations make sense? Will Netflix change so radically and not be able to correct its missteps?



to find out how a company's products impact its stock price at Trefis

Like our charts? Embed them in your own posts using the

Trefis Wordpress Plugin


This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.