Written by Summary
Competition has intensified in recent years but Netflix continues to outgrow peers internationally.
I estimate Netflix to have reached 29% global penetration which leaves room for continued long-term membership growth.
Netflix will continue to benefit from operating leverage and margin expansions.
Through a simple valuation using the exit multiple approach, I find Netflix to be fairly valued or just slightly overvalued at $340.
stockcam/iStock Unreleased via Getty Images Thesis
Netflix’s (NASDAQ: NFLX ) run-way for growth continues to be long and they are a long way from market saturation. The structural growth case is intact. I believe international competition to be overstated by investors and their dominance understated for reasons which I will explain in this article. They will continue to penetrate and add new memberships from EMEA and APAC as I estimate both of these to be <30% penetrated as of 2021. Netflix is set to continue revenue growth in the double digits and at the same time benefit from operating leverage/margin increases. Business overview
Netflix is one of the world’s leading companies in entertainment services, offering a subscription-based video-on-demand (SVOD) product. >99% of Netflix’s revenue is derived from their streaming service in the form of subscription-based payments. At year end 2021 , Netflix had 222 million subscribers spread across 190 countries. The average monthly revenue per membership was $11.67, a number that has grown in the past and should continue to do so. Potential memberships
As of 2021, there were 1 billion pay TV subscribers worldwide. China accounts for 325 million of these, a country in which Netflix is not available. If you exclude China from the equation, we are looking at 650-700 million pay TV subscriptions worldwide as of 2021.
Looking at worldwide broadband subscriptions: As of 2021, there were 1.31 billion fixed broadband internet subscriptions worldwide, a number that continues to grow. Performing the same exercise of excluding China , we get 780 million fixed broadband subscriptions as of 2021, a number that has grown 4-5% per annum since 2016.
In 2014 there were 100 million pay TV subscribers in the US. In that same year there were 98 million broadband connections. Pay TV in the US has since then declined every year while the number of broadband connections have risen and there is for this reason, currently a gap between broadband subscriptions and pay TV subscribers in the US – a gap that will increase going forward as more households cut pay TV and adopt streaming. The number of Pay TV users are therefore not capturing all potential Netflix members as some non pay TV members subscribe to a streaming service. Virtually all broadband subscribers will also pay for entertainment in some form which makes them potential Netflix members.
I conclude that Netflix’s current membership TAM is c. 750 million. How many of these memberships they will eventually reach comes down to several things and the c. 750 million is therefore not a “perfect” number.
Netflix has managed to reach 222 million of these which has resulted in around 29% global penetration. Data obtained from Statista (Source: Author) Data obtained from Statista (Source: Author) Broadband connections have grown by c. 30 million per annum resulting in Netflix’s membership TAM growing.
Pay TV subscribers in the US have declined from 100 million in 2014 to 73 million in 2021 and is expected to fall to 60 million in 2025. A trend that sums up the decline of linear TV. The adoption of pay TV in emerging (especially Asian) countries are making up for that decline which has resulted in the total number staying flat. Structural drivers of streaming adoption
A large untapped market opportunity remains and based on the numbers presented, the market is big enough for Netflix to keep adding 20-30 million members per year. To figure out whether they will do this or not we have to understand what has driven the rise of streaming until now. These structural drivers will also be part of the explanation for why Netflix and streaming in general will grow memberships in the future.
Netflix is substituting and or is an alternative offering to pay TV which includes cable TV, satellite TV and IPTV.
The structural drivers of growth in streaming include (I) you have the freedom to choose exactly what and when to watch a given show/film on the streaming service with the alternative being a pre-scheduled program. It is much more convenient to be able to choose when to watch a specific show/film instead of having to plan your […]
Written by Summary