Why Netflix Makes Sense at $100

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.
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By Trefis.com

NEW YORK (

TheStreet

) --

Netflix

(NFLX) - Get Report

, 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) - Get Report

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.

(3) Apple (AAPL) - Get Report TV and iTunes Develop into a Greater Threat

Netflix is currently poised to benefit from Apple's iPad and iPhone content distribution platforms by creating apps that will allow Netflix subscribers to stream content to their iPads and iPhones. In the long run however, Apple TV and the distribution of films, TV shows and other media through iTunes may pose a threat to Netflix as the success of the iPhone and iPad, as well as greater marketing efforts from Apple, spur demand for Apple TV.

Exceeding 45 Million Subscribers

(1) Disruption of Cable and Satellite Market

Netflix needs to attract more pay-TV viewers to expand its subscriber base. The company is competing with cable and satellite pay-TV operators that have a combined subscriber base of around 105 million and these subscribers increasingly have access to digital services like video-on-demand. By incorporating more TV shows into the Netflix offering, the company may succeed in winning over some pay-TV subscribers that have limited consumption of TV shows and films.

In order to succeed, Netflix will have to strike more deals with studio to bring the latest releases of movies and TV shows online. However, this attempt by Netflix will not go unchallenged by pay-TV providers.

(2) Wide Distribution Through Xbox, Wii and PS3 Consoles and International Distribution

There have been more the 140 million Xbox 360, Wii and PS3 consoles sold, providing a wide distribution base for Netflix's streaming content. The majority of these consoles are outside the US where Netflix has little presence to date. However, this may change as the shift to streaming content accelerates. A rise in subscribers outside the US could cause Netflix's overall subscriber count to leap.

For additional analysis and forecasts, here is

our complete model for Netflix's stock

.

Trefis

is a financial community structured around trends, forecasts and insights related to some of the most popular stocks in the U.S.