Netflix, Inc. (NASDAQ:NFLX)’s $450 and rising valuation is a tough sell according to the analytical software of Trefis, which currently has a $315 price on the stock. The Trefis Team took a longer-term look at the stock in an article for Forbes, and found that while multiple scenarios could increase the value they apply to Netflix, Inc. (NASDAQ:NFLX), a lot will have to go right for it to reach its current valuation.
The first potential driver of value they cite would be to generate greater revenue and higher margins from their existing U.S customer base. This could be accomplished by bumping the service rate up to around $10 per customer, which they estimate could raise margins to 40% and add about $55 in value to Netflix, Inc. (NASDAQ:NFLX)’s stock.
However they also raise the specter of differential pricing and customized content becoming a possibility, which would seem to be at odds with pushing for greater revenue and margins. If Netflix, Inc. (NASDAQ:NFLX) begins chopping up their offerings and providing them at value rates in packages, they run the risk of margins substantially dropping given the increasing costs of licensing all the content they provide.
Another driver of value will be to convert their international operations into profitable ventures. This has now happened for Netflix, Inc. (NASDAQ:NFLX) in Canada, the first country it expanded into, and will almost certainly follow in time in the host of other countries it has moved into. However the rate will be key. Trefis estimates that Netflix, Inc. (NASDAQ:NFLX)’s international operations are currently providing negative -14.5% value, but that this could increase to +32.5% in several years. However, Trefis believes it will need to achieve +40% to justify greater value being placed in Netflix, Inc. (NASDAQ:NFLX)’s stock.
Lastly, they believe Netflix, Inc. (NASDAQ:NFLX) will need to lower their risk in the form of their WACC (weighted average cost of capital) to below 10% to add the final piece of value to the $445 puzzle. The only way they see that happening is if their Beta declines through the stock becoming more stable.
Netflix, Inc. (NASDAQ:NFLX) has fluctuated wildly over the past four years, rising from the low $50 range up over $280 before sliding all the way back down to the mid $50 mark. From there it’s been on a fairly steady march up to current levels, although we have even seen those swings in the stock this year, with it dropping from $450 in March to $315 in April before climbing back to $470 in July.
Netflix, Inc. (NASDAQ:NFLX) is currently trading at $447.31 in afternoon trading.
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