As Netflix surges to new record high, those of us not involved – including 2CentView – ask how and why is this stock just going higher?
Many market participants (and the 2CentView fair value model) base their valuation model on a discounted cashflow approach – and they stay out of the stock because this model valuation is always well below the current stock price. 2CentView FV Model for $NFLX = 365 vs 613.
Other (and perhaps smarter) investors look at TAM – the total addressable market and how much NetFlix can take of the TAM.
You can try and search the TAM on the internet – or make your own calculation/assumption – I think it is reasonable to assume that all 1.6 billion facebook users are potential users of NetFlix!
So TAM = 1.6bn Subscribers x Annual Subscription of $100 = $160bn dollars. NetFlx currently has 60 million subscribers.
How much of this TAM can NetFlix keep long term?
Such a large potential TAM will not go unnoticed by competitors – there is Amazon Prime Instant Video, HBO also entering the market – – we could see half a dozen competitors enter the space – but many of these will subscribe to more than one service – I subscribe to NetFlix and Amazon Prime!
So assume NetFlix can keep 20% of the TAM (around 320m subscribers from the current 60m) – thats $32bn – $26bn more than the current 2016 revenue projection – much of which will go straight to the bottom line assuming they can scale the business…Even if they spend $5bn on additional content and better technology – their costs should not go up massively to reach this TAM as it is just about getting content to more user e.g. CHINA! Hence why stock rallied 5%.
So NetFlix could see bottom line earnings of around $10bn by 2018 = applying a low 10x multiple to this you get $100bn market cap! so the TAM approach sees a very different valuation to the normal discounted earnings approach.
When Carl Ichan sold half his NetFLix stake at 320 – his son told him it was a big mistake – his son clearly had the right insight to the potential of NetFlix – the TAM, the technology, the strong management team lead by Reed Hastings..
Is it too late to buy? the TAM Approach says NO – NetFLix market cap could be $100bn by 2018 – the discounted cashflow approach says YES – in fact you should short it -as many have done!
2CentView is that – look at great companies, which disrupt and change consumer behaviour differently to traditional valuation methods. If you decide to buy, do the valuation using a TAM approach, believe in the managements team ability to execute and hold long term if they are executing the strategy – which does not mean selling after one bad quarter.