Tag Archives: Mark Mahaney

Business, Finance, Occupation & Industry

2 Stories for Netflix, but Only 1 Ending — Rags or Riches?

Leave a comment

By Adam Levine-Weinberg, The Motley Fool

Filed under:

The gap between the projections of Netflix analysts and the company’s management continues to grow wider. As the Netflix stock price has skyrocketed in the past few months, analysts have raised their price targets to match. However, a closer look at their reports shows that they are not nearly as bullish about Netflix’s business prospects as Netflix CEO Reed Hastings or other insiders.

This combination of low analyst expectations, high management expectations, and high analyst price targets could prove volatile. If Netflix performs up to management expectations in the next year or two, the stock could see another round of upgrades and raised price targets, as the company’s fundamentals would be outperforming the analyst models. However, if analysts are right about Netflix’s growth trajectory — a scenario I believe to be more realistic — the stock could drop precipitously in spite of their high price targets.

New week, new upgrade
On Tuesday, Netflix shares rose by as much as 6% after Pacific Crest analyst Andy Hargreaves raised his price target from $160, to $225. Hargreaves cited “increased margin and subscriber assumptions” for the move. However, his domestic subscriber growth assumptions are actually quite modest. Hargreaves now expects Netflix to grow from 27 million subscribers at the end of 2012, to 36 million domestic subscribers by 2015, with a plateau around 46 million domestic subscribers by 2021.

Hargreaves’ analysis is very similar to a bullish call made by RBC analyst Mark Mahaney earlier this month. Mahaney expects the domestic subscriber base to reach 39 million by 2015, and derived a $210 price target from that analysis. These subscriber estimates dovetail well with my analysis of the market opportunity for Netflix. Premium video leader Time Warner boasts approximately 41 million U.S. subscribers between its HBO and Cinemax services. HBO can attract many subscribers, despite its high price, because it has very high-quality original programming. Netflix is trying to move in that direction with new series like House of Cards. With improving content quality and a low price tag, it seems reasonable to project that Netflix will reach a similar level of market penetration as Time Warner within a few years.

Watch the gap!
However, this is not what Netflix’s management is projecting. Netflix CEO Reed Hastings has stated that the company’s addressable market in the U.S. is 60 million-90 million households. . While I do not think that Netflix management seriously expects to reach the upper end of that range (which would be equivalent to roughly 100% of broadband households), Hastings talks about the 60 million figure as a target for the end of this decade.

To reach 60 million subscribers by 2020, Netflix would have to average more than 4 million net new domestic subscribers per year over the next eight years. By contrast, Tuesday’s bullish call by Pacific Crest assumes just 3 million subscriber additions per year through 2015, and an end-of-decade target of just 46 million domestic subscribers. Clearly, there …read more
Source: FULL ARTICLE at DailyFinance

Business, Finance, Occupation & Industry

Netflix Gets a Bizarre "Like" From RBC

Leave a comment

By Adam Levine-Weinberg, The Motley Fool

NFLX Chart

Filed under:

On Tuesday, RBC analyst Mark Mahaney resumed coverage of Netflix with a buy rating and a $210 price target. While many investors have become bullish on Netflix recently, Mahaney’s decision to place a buy rating on the stock was odd for two reasons. Most obviously, he’s a little late. Netflix shares have already more than tripled in the past six months! While Mahaney sees another 15% upside, investors who have been waiting on his call missed the real party.

Netflix 6 Month Price Chart, data by YCharts.

However, the rating was also bizarre because the underlying analysis was not very bullish. Mahaney expects the domestic subscriber base to continue growing, but only at a moderate rate. Meanwhile, he expects the international business to lose money for at least two more years. With these parameters, Netflix looks more like a sell.

Slow subscriber growth
In an interview on CNBC on Tuesday, Mahaney stated that Netflix could continue to add around 5 million domestic subscribers per year for the next few years. The main growth driver, in his opinion, is the ongoing shift of video consumption from TV to the Internet. In his research note, Mahaney pinned down his growth expectation further, predicting 39 million domestic streaming subscribers by 2015.

This implies an approximately 15% CAGR in subscriber numbers (and domestic streaming revenue, assuming no price increases), depending on exactly when in 2015 Netflix hits 39 million subscribers. By contrast, Netflix grew its domestic subscriber base by 25% in 2012, and “real” Netflix bulls like my fellow Fool Anders Bylund expect growth to remain above 20% for at least the next few years.

The upshot
I think Mahaney’s subscriber growth estimates are probably on target. Competition from Amazon.com , which seems willing to run its Prime Instant Video service at a loss, will intensify over the next year or two. Furthermore, the streaming service has high churn: Netflix has thrown out numbers like 5% per month previously. As the subscriber base increases, it becomes harder to offset that churn: If churn is still 5%, that means that 1.35 million Netflix users are canceling every month. Even if Netflix’s investments in original and exclusive content eventually reduce churn to 3%, that still becomes a big drag as the subscriber count approaches 40 million or 50 million.

If Mahaney’s relatively modest subscriber growth projections hold true, domestic streaming profit will not replicate its recent growth. Domestic streaming contribution profit more than doubled from fourth-quarter 2011 to fourth-quarter 2012, due to 24% revenue growth offset by a modest 13% increase in costs. I do not expect cost growth to slow significantly in the near future; with competitors like Amazon joining the bidding, content prices will probably continue to rise.  However, if revenue only grows by 15% going forward, the contribution margin will not expand much further. This implies that profit from domestic streaming will only grow at perhaps 20% annually, which is not …read more
Source: FULL ARTICLE at DailyFinance