is an online movie rental business that operates on the subscription model and offers its customers physical DVDs as well as online streaming. Netflix recently reported results for the second quarter of 2010.
Key earnings nugget: Although Netflix's subscriber base increased sharply, DVD shipment growth slowed as more subscribers chose the streaming video option. We think this is good news for Netflix, because shipping fewer DVDs will save the company money that it can invest in marketing and content acquisition.
We have updated our price estimate for Netflix's stock from $82.26 to $85.06. Our analysis follows below.
Streaming Up, DVDs Down
Overall DVD shipments continue to grow as Netflix adds subscribers. But growth in the number of DVDs mailed per subscriber slowed in the second quarter of 2010 compared to the previous quarter.
At the end of 2008, Netflix mentioned that early adopters of streaming were cutting back on their DVD usage. The percentage of Netflix subscribers using streaming service for 15 minutes or more climbed to 61% in the second quarter of 2010, compared to 55% for the first quarter.
The chart below shows how streaming is slowly replacing DVD for Netflix subscribers:
Good riddance to DVDs
We estimate that Netflix spends as much as 10 times more to deliver a movie offline (in DVD form) compared to online delivery (via streaming). As streaming increasingly replaces DVDs, Netflix should realize significant cost savings.
Netflix will probably invest these savings in marketing and content acquisition, as it did in the most recent quarter. These investments could yield incremental subscriber growth. Each DVD costs Netflix around 60 cents in mailing and shipment center costs. Subscriber acquisition cost currently run close to $25 per subscriber. So Netflix could potentially gain one new subscriber for every 40 DVDs that it doesn't ship.
You can move the trendline in the chart below to see how changes in Netflix's subscriber base impact the company's share value.
You can see
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