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Netflix's track record of success and stock market valuation


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BY : Diego GutiérrezMay Fri, 2019

The streaming video sector is a thriving sector, with more and more companies entering the sector, being Netflix, HBO, Amazon Prime Video, Hulu, Sling or Hotstar.

A sector that already has a base of more than 446 million paying subscribers among the world's largest companies and which has been experiencing an unprecedented growth in excess of 20% per annum in recent years.

A few days ago Apple announced the launch of Apple TV+ a channel that plans to base its growth on the production and distribution of its own series, with directors such as Spielberg.

In the following post we will analyse the trajectory of Netflix and the consequences it has had on the company's stock market valuation.

History

Netflix emerged in 1997 with the concept of a virtual video store, in which you could choose films through an online platform, and which sent you the chosen films by post.

However, the change of model towards the online streaming display The creation of a monthly subscription service with unlimited access to content has been the model that has catapulted it to success.

In addition, in 2011, Netflix took a major turn and began acquiring original content and even co-producing it, gaining a strong branding and differentiation by having series that could only be viewed on the platform.

At the beginning of 2019, Netflix revealed the global subscriber figures for its platform, which reached 139 millionwith the aim of being able to over 150 million later this year.

Pricing

Another of Netflix's unique features is its pricing. The company offers different types of packs, both individual and family packs.

About quite affordable prices which are adapted to the country of destination, with prices ranging from 8 to 15 euros per month.

Even so, these prices are going to changeAs was the case in 2016, Amazon has announced a small price increase of between 1 and 2 euros in order to increase investment in content creation and start reaping profits.

Financial Analysis

At bakertilly we see that Netflix's turnover has maintained very high growth rates over the last 4 years due to two main reasons: User base and pricing.

Netflix has managed to optimise pricings in a big way, managing not only to increase subscription prices in 2016 and expecting to do so in 2019, with no impact on the subscriber base, but also to increase the subscriber base by choosing premium packages for a higher amount, resulting in a higher average profit per user.

Netflix's other great asset is its user base, which in the last few years has been 2017 increased by 24% and in 2018 in a 33%, maintaining a target of similar or even higher growth in 2019.

Thus, we can break down how this increase in subscription sales revenue comes mainly from a continuous increase in the number of subscribers over time, accompanied by a good pricing that has been able to increase revenues by 8% in 2017 and 2% in 2018.

Thus, taking into account the expected growth for 2019, we can see how the increase in Netflix's prices could help to reduce its dependence on continuing to grow the number of subscribers in order to improve its bottom line.

As an indication, it should be noted that due to the price elasticity of the product in question, the increase in revenues is expected to be quite positive and could increase EBITDA by more than 5%, even taking into account the possible downgrading of subscribers or the downgrading of the subscribed service of a few others.

Finally, it is worth mentioning that the aim of this strategy is not only to improve the EBITDA They also expect to be able to have a wider range of Cash Flow that allows them to to reduce net financial debt and to be able to increase the investments in the creation and purchase of own content in order to further differentiate themselves from the growing competition.

Netflix Quote

As can be seen in the Netflix's share price has been growing significantly in all years except 2012, when it suffered a major setback due to losses and failure to meet expectations.

It is important to mention that the company's share price that can be seen on the market differs than the one published in this article, and that is due to the (Split) of actions that was carried out in 2014, This means that for every old share, 7 new shares could be exchanged, which means that the figure you see in the graph at the current date is 7 times higher than what you could find in the market.

Even so, this quotation is expected to continue to grow due to the growing digitisation of the world, the change of citizens' habits and the entry of Smart TV worldwide, which is enabling greater penetration of the platform itself.

Conclusions

Netflix's growth is going to be underpinned by the ability to creating original content of valuethat it is able to continue to be more attractive than its competitors and the ability to be able to continue to perform well in the future. price segmentation that helps to improve the company's financial principles without requiring a large investment in advertising or in the creation or purchase of new content.

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