Netflix Valuation (October 2014)

Netflix fell almost 27% as soon as the latest earnings were reported. It was assumed that NFLX would add to subscribers, but subscriber growth was under the expectations and so was EPS growth.

In this post, I will present my assessment of NFLX intrinsic value. Netflix's valuation is based on its growth in US and international subscribers, margins per subscription category as well as content costs for the different segments.

Trefis the online valuation team assessed NFLX valuation to be $315 prior to latest earnings release. You can see that the price is made up of $5.37B revenue and $5.15B in expenses for 2014.

1. Average fee per subscriber will rise from $7.61 (2014) to $8.78 (2021)

2. US Domestic Streaming Subscribers will rise from 39.6 million customers to 57 million in 2021

3. Average fee per subscribing international customer will rise from $$7.17 in 2014 to $ 8.31 in 2021

4. International subscribers will rise from 26.2 million to almost 100 million

5.  The other element where my assessment of Netflix's trajectory is different in terms of international contribution margin. I feel this will grow from 3% in 2014 to 42.5% which will bring it more in line with Domestic contribution margin.

6. Last element where my assessment is different from Trefis team is Technology R&D costs. I think as Netflix becomes more international, it will have opportunities to lower its Technology R&D costs by at least 0.5%.

7. Final analysis reveals a target of $390....

Ofcourse, the market is not factoring an international growth of similar proportions and it is unlikely that it will do so for a while...

Update October 26th: The stock price closed on Oct 24th at $385, which implies that the market has factored in a more rapid international market growth. We could see the stock cross its valuation of $390 in the coming week and perhaps north of $400 in first two weeks of November 2014.