Analyst Carlos Kirjner offers four scenarios of how the relationship between Netflix, Inc. (NFLX) and cable TV plays out; all are bad for Netflix.
Netflix, Inc. (NASDAQ:NFLX) has been performing remarkably well as bulls push its stock higher and higher, sensing a revolution within the television industry. But is Netflix really the future of TV? Will it ever get along with cable companies, or is it doomed to remain their enemy forever?
Bernstein Research analyst Carlos Kirjner offers four possible scenarios for Netflix within the cable industry. He says every one of these four scenarios suggests that the company is overvalued right now.
#1: Netflix grows, but remains a complementary service
First he says it’s possible Netflix, Inc. (NASDAQ:NFLX) will grow its subscriber base to 40 million or even 45 million domestic subscribers. However, it may not change much and will continue to remain a complementary service to traditional cable television. He said in this case, households are not watching Netflix two or three hours a day because if they were, then it would be more than just a complementary service. He also said Netflix would have to keep its price at around $8 per month because competition and substitute services would prevent it from being able to raise prices.
This scenario keeps the market pretty much the same as it is now with Netflix and cable television providers co-existing just as they do now. This scenario suggests that the company is overvalued right now.
#2: Netflix improves much but grows just a little
In the second scenario, Netflix, Inc. (NASDAQ:NFLX) is just a bit larger than it is now, but its services are better. It either competes with or substitutes for cable television, but only in moderation. He thinks if this scenario happens, they would continue to co-exist rather peaceably, although it would be more of a cold peace.
Under this option, he sees Netflix hitting 30 million to 40 million subscribers who watch the company’s service an average of two or three hours per day. He thinks the company could increase prices a bit without affecting demand too much. He sees more cord cutting as a result of this scenario, but the negative impact on cable companies would be limited by Netflix’s subscriber base. This scenario also suggests Netflix is greatly overvalued.
#3: Netflix becomes a substitute for pay television
Kirjner believes the bull case for Netflix, Inc. (NASDAQ:NFLX) is already mostly built into the company’s current stock price and that it implies a major increase in the number of subscribers, going up to 50 million to 60 million at least. It also suggests a meaningful price increase for Netflix from $8 a month to $10 or even $12 a month. He thinks a price increase like this would be bad for the company’s revenues because it would reduce the company’s elasticity and slow its subscriber growth.
He estimates that 25 to 33 percent of homes could cut their cable service off, which of course would be a big negative for cable companies. In turn, they would probably implement some sort of usage-based pricing for broadband, which would directly target Netflix subscribers because most cable companies also control broadband services. The result is equivalent to a major price increase for Netflix subscribers, and he said this would prevent the company from hitting even 40 million subscribers, which returns us back to the second scenario and suggests that Netflix is far overvalued.
#4: Netflix makes a deal with cable companies like HBO
The analyst sees the best-case scenario for Netflix, Inc. (NASDAQ:NFLX) as being treated more like a cable channel rather than a cable company. He said the company could make a deal with cable providers for them to market and distribute its service like it is another channel. He sees this deal as leading to Netflix having 50 million to 60 million subscribers, paying about $10 or $12 a month for the service.
Of course he notes that current content licensing deals will likely keep this from happening any time soon in the U.S. Also he said it might be difficult for Netflix, Inc. (NASDAQ:NFLX) make an offer that’s sweet enough for the cable companies to accept. He suggests a payment of $4 or $5 per month per subscriber might be enough, although he doesn’t know why Netflix would even do this because its margins would crash. If this scenario happens, the company would be overvalued yet again.