What's Netflix Worth?
Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Netflix (NASDAQ: NFLX), the well-known provider of online movies and TV shows, has had an amazing last 12 months. The stock price crashed from $125 in early 2012 to a low of $53 as the company made some missteps and lost favor on Wall Street. In the fall, famed investor Carl Icahn reported he had an almost 10% stake in the company. In response, the stock price rose about 30% to around $80. Netflix also regained Street confidence with a recent better than expected preliminary quarterly result. The company announced a surprise profit for the final three months of last year, as well as the addition of 3.8 million subscribers to their video-streaming service, and the stock jumped another 40% higher on the news. The shares continued to rise as investors viewed the company’s future more favorably.
Now the investor wants to know where it can go from here. One helpful clue is an appraisal on what the company is worth. Though the shares can trade at a significantly higher or lower price for an extended period of time, eventually the stock ends up settling at a level resembling the business's fair value.
There are many methods to value a company, but one way that seems appropriate for Netflix is enterprise value (EV) per subscriber. This method basically takes the EV, or total stock market value plus long term debt, of comparable companies on a per subscriber basis and then applies an equivalent factor to Netflix.
There are four companies that might be a good comparison for Netflix: Cable TV providers Time Warner Cable (NYSE: TWC) & Comcast (NASDAQ: CMCSA) and satellite TV providers DISH Network (NASDAQ: DISH) & DIRECTV (NASDAQ: DTV).
The determination of EV per subscriber reveals that for the cable TV providers, Time Warner Cable has an EV of around $56.2 billion with roughly 15.3 million subscribers meaning an EV per subscriber of $3673. Comcast, using estimated figures for their cable TV business only, has an EV per subscriber amount of $4052 based on 23.0 million subscribers and an EV of $93.2 billion.
For the satellite TV providers, DISH Network came in with an EV of $27.1 billion and around 14.0 million subscribers resulting in an EV per subscriber value of $1935. DIRECTV, with an EV of $50.5 billion and 29.6 million subscribers, has a per subscriber worth of $1706.
The data indicates that, in general and using round numbers, the market assumes reasonable fair value at $3800 per subscriber on a cable TV basis and $1800 per subscriber on a satellite TV basis. Why the big difference between cable and satellite valuation?
One major reason is the amount of revenue each subscriber provides. A cable TV subscriber generates about $400 of sales per quarter and the satellite subscriber generates roughly $250 per quarter.
Revenue per subscriber is significant, especially when assessing Netflix. The company generated sales of about $30 per subscriber per quarter over the recent reporting periods. For valuation purposes, the cable and satellite EV per subscriber amounts need to be adjusted when applied to Netflix. It would not be fair to give Netflix enterprise value credit at the same amounts as the cable or satellite providers when the company only brings in revenue at a fraction of what the other providers generate.
After adjusting for the lower sales per subscriber, we finally get to a benchmark comparable value estimate of $285 per subscriber on a cable TV basis and $216 per subscriber on a satellite basis. Given Netflix has roughly 39 million subscribers that equates to an equivalent fair value range of around $188 to $143 per share.
But our $188 to $143 per share Netflix fair value estimate is not definitive. There are other considerations that may indicate a higher or lower price range is appropriate.
Some factors favoring a higher value include:
Netflix may have better growth potential that the cable/satellite players.
Netflix is a smaller, more nimble company that can innovate quicker.
Netflix may be an acquisition target, as suggested by Mr. Icahn.
Some factors favoring a lower value include:
Cable/satellite providers face less competition in their core business.
Cable/satellite providers may have better purchasing power for distribution content due to their size.
Fair value estimates are not an exact science, but they do help when considering if a share price is grossly overextended or greatly undervalued. Netflix is a good example. Carl Icahn again proved his ability to spot a bargain when he took advantage of a noticeable under valuation and bought in at an average share equivalent cost in the mid $50's. (There’s more about how Mr. Icahn does it here.)
While this Netflix valuation exercise is certainly not the final word and further analysis would be necessary; it is a helpful starting point to estimate what the company might be worth.
grahamsway (Bob Chandler) has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!