As you know I am first and foremost interested in Dividend Aristocrats/companies with long history and stable businesses. Sometimes it is good to have a look at other companies too. Once I looked at Facebook and I found it not interesting. The other time I looked at Apple and I found it a great opportunity and so far I earned some money on this investment. Today I will look at Netflix – company which is famous for TV series and streaming business.

As we can read on company’s website:

People love TV content, but they don’t love the linear TV experience, where channels present programs only at particular times on non-portable screens with complicated remote controls. Now Internet TV – which is on-demand, personalized, and available on any screen – is replacing the linear TV experience.

Changes of this magnitude are rare.   Radio was the dominant home entertainment media for nearly 50 years until linear TV took over in the 1950’s and 1960’s.   Linear video in the home was a huge advance over radio, and very large firms emerged to meet consumer desires over the last 60 years.   The new era of Internet TV is likely to be very big and enduring also, given the flexibility and ubiquity of the Internet around the world.   We hope to continue being one of the leading firms of the Internet TV era.  

I fully agree! That is why also Apple is thinking about Apple TV and other companies are looking for business in this area. What is also important – TV for many young people is not necessary device. If you can watch what you want on your PC then why should I buy TV?

This flexibility makes Netflix to grow very fast:


We can see that company is growing very fast – around 20-30% year on year. Such strong growth in my opinion can be continued in the future – still penetration is not high. At the end of September 2016 there were around 47m users in US, 40m in International segment and so altogether around 86m. Well, Facebook has 1.8b active users. Sure, you can say that Facebook is free so we can’t compare potential clients – that’s true. But if we take only 20% of FB users will use Netflix then it gives us 360m people. 4-5 times more than currently – still huge potential.

Business is profitable and I think that with increasing number of users margins should expand (based on website, which I sincerely recommend):


On the other hand valuation is very high:


Let’s assume that number of users will be 4 times higher. Then let’s assume EBITDA is around $2b, then EV/EBITDA = 25, so still not cheap.

Let’s assume that in long term company should be worth 10 times EBITDA (when growth dynamics will be significantly lower). It means that results should be 10 times higher than currently, so around 870m users. Every ~1/10 citizen in the world should use Netflix. Assuming that in many households there are 3-4 people it sounds extremely optimistic…

OK, one may claim that fee for using Netflix can go up. OK, by how much? 10%? 20%? 50%? Still it doesn’t justify valuation (in my opinion).

Sure, one can say that with growing scale marketing revenues should increase. But wait, isn’t idea of Netflix an access to streaming without ads?

Also keep in mind that there are/will be competitors to Netflix. Companies like Apple or Samsung can find tones of synergies between such offer and hardware. Also Amazon Prime is an important competitor.


Summing up, Netflix is a great business, but quite too expensive for me now.


Disclosure: NFLX – no position