Netflix, Inc. $200? It’s Possible
Investors of on-demand video streaming giant Netflix, Inc. (NASDAQ:NFLX) has been generously rewarded this year as NFLX’s stock price skyrocketed more than 150% in less than 11 months. Standing at $123.92 a share, Netflix stock is not cheap, especially when you look at its price-to-earnings (PE) multiple hovering over 300. However, despite its hefty price tag, some analysts are quite confident that the company’s bottom line would improve in the future.
Could NFLX Stock Hit $300.00?
Last month, RBC Capital Markets analyst Mark Mahaney reiterated his “Buy” rating on NFLX. The analyst said that Netflix’s international subscriber growth would continue its strong momentum and the long-term international penetration level could be around 30%. This suggests that Netflix could reach approximately 200 million global subscribers, roughly three times NFLX’s current subscribers.
Mahaney calculates that with average revenue per user (ARPU) of $11.00 and a 30% operating margin, NFLX could achieve $10.00 or more in earnings per share. Based on a market premium P/E multiple at 20X, Mahaney believes that NFLX stock has the ability to reach $200.00 per share within the next three to five years. (Source: “RBC Capital Pounds the Table on Netflix, Inc.,” Smarter Analyst, November 20, 2015.)
Are these estimates realistic? In recent months, international expansion has been driving Netflix’s user growth. In the second quarter of 2015, NFLX added 3.3 million total subscribers, with 2.4 million coming from outside of the U.S. In the third quarter, Netflix expanded its global subscribers by 3.62 million. Among the additions, 2.74 million came from overseas. (Source: “Q3 15 Letter to Shareholders,” Netflix, Inc., October 14, 2015.)
So, how can Netflix guarantee its success in markets it is yet to tap into? Well, according to a study by research company Global Web Index, Netflix already has tens of millions of viewers in countries where Netflix doesn’t offer its service. The study was based on a survey of virtual private network (VPN) users, who can bypass geographical restrictions on Internet content and access material that’s not technically available in their regions.
The survey found that 29% of global VPN users said they had used Netflix in the previous month. The highest percentages were in Canada and Mexico, where VPN users were likely to be accessing the American version of Netflix to watch shows that were available only on Netflix in the U.S.
The more interesting numbers are the high percentages in India and China: 32% for VPN users in India and 31% in China. Since Netflix was not available in those two countries, these numbers suggest that Netflix already had solid followings in those two potential markets. (Source: “29% of VPN Users Accessing Netflix,” Global Web Index, last accessed November 30, 2015.)
The company made its first foray into Asia by launching its on-demand video streaming service for Japan this September. Netflix also has plans for entering China, a country with a huge fanbase for American TV shows such as House of Cards. Launching the service in China might not be easy, but Netflix has been exploring options to enter the most populous country in the world.
The Bottom Line on NFLX Stock
Netflix’s international expansion is well underway, with South Korea, Hong Kong, Taiwan, and Singapore scheduled to launch in early 2016. As the number of subscribers continues to grow, Mr. Mahaney’s $200.00 target price on NFLX stock is not that crazy.