Giant addressable market
The GS report estimates that the producer of the mega-hit The House of Cards addressable audience of subscribers will at least double over the next three years to 207 million households. The GS analysts predict the company adds six new markets this year and two to four more markets over the following two years. With 30% international penetration currently, Netflix could have as many 62 million international subscribers by 2017. Terry et al also note that Netflix, Inc. (NASDAQ:NFLX) should be enjoying 20%+ margins through increasing scale benefits at that point in its expansion.
Netflix’s new content offerings will increase average revenue per user
The analysts also note that the recent price increase is only a part of Netflix, Inc. (NASDAQ:NFLX) management’s average revenue per user expansion strategy. They argue that the firm’s focus on new content will also pay off. The report notes that as Netflix adds new content offerings, such as children’s entertainment, and mobile device consumption continues to increase, “the mix of multi-stream plans will increase, driving ARPU expansion beyond the basic $8.99 plan.”
Estimates and valuation
The Goldman Sachs report laid out the case for its lofty 12-month $590 price target on Netflix, Inc. (NASDAQ:NFLX) by increasing 2014-2016 revenue and EBITDA estimates by 6% and 7% to properly model the rapid growth in international subscribers and higher U.S. ARPU. The analysts calculate the $590 price target based on 35X 2015 EEV/EBITDA to reflect revised estimates and the significantly larger total addressable market.
Terry et al bolster their argument with a comparison to industry peers. “…26X 2015E EBITDA on almost 50% 3-year EBITDA growth compared to the Internet sector at 14X on 30% growth, we believe the potential for further outperformance is high.”
