- The increase in subscription prices drives my revenue assumptions domestically, as I anticipate domestic streaming to reach $5.4 billion in FY 2016.
- I anticipate international streaming to grow to $3.491 billion, and the DVD mail order business to stay stable at around $600 million.
- Overall, it seems like Netflix is on track to beat on revenue in FY 2016, as I anticipate a $810 million revenue beat (sales remains the most important metric).
- While revenue growth remains the most redeeming quality of Netflix, there's no denying the cash burn rate, and the need to raise capital via debt auctions.
- This does pose some risk to investors but is offset by rapid top line expansion and durability of the competitive moat.
Netflix (NASDAQ:NFLX) reported a decent quarterly earnings with some modest misses on sales and earnings in Q3. However, aside from those short-term hiccups, the company positions itself structurally to generate meaningful sales growth in FY 2016. Netflix stock closed yesterday at $110.23, up 0.46%.
Netflix US Subscription
I see subscription additions growing by 10-12% in the United States next year, and $9.99/month pricing implementation in the beginning of Q3 of 2016. The incremental subscriber gains are priced at $10/month. So by the end of 2016 we're looking at subscriber figures reaching 50 million, but the incremental impact sort of lags, because you're not booking revenues on the 5 million in incremental subs throughout the entire year. So I average the impact of subscriber additions to midpoint and assume that Netflix books revenue on about 2.5 million in additional subscribers, and prices those subscribers at $10/month. However, the remaining subscribers being carried over from older agreements are priced from $8.99/month to $9.99/month during the year and that impacts roughly a half to a third of the year. But, for the sake of simplification I'm thinking half of the year.
After running the numbers in Excel, I arrive at approximately $5.4 billion in revenue in the United States from streaming for FY 2016. This compares to $4.176 billion for 2015 with Q4 FY 2015 being forecasted. Of course, the growth in terms of revenue domestically is 31.7%, so there's some meaningful acceleration to sales.
International Subscription Growth To Stay On Track
However, the international segment also offers a lot of promise, as subscriptions are forecasted to grow by 61.3% in 2015. That's tremendous growth. However, there could be some weakness on ASPs depending on FX impact. For the most part, I'm pretty sure Netflix stays on track internationally as they're slated to release more streaming services in various regional markets. That sustains the subscriber additions momentum but for the most part, I'm sticking with a long-term 47.61% CAGR for international subs.
Netflix 2016 Revenue To Beat Expectations
Therefore, I feel comfortable projecting 43.35 million subscribers in 2016, and ARPU of $7.99/month. However, because Netflix doesn't book revenue on subscribers for the entire duration of the year, I'm working with a midpoint of paid subscribers of around 36.42 million. This implies that revenue from the international streaming segment should be $3.491 billion. This totals to $8.89 billion revenue from streaming, and an additional $600 million in revenue from DVD mail orders, which totals to $9.49 billion in consolidated revenue. This is $810 million above the consensus estimate figure for revenue in FY 2016. I anticipate that analysts will revise estimates higher in anticipation to better than expected performance from domestic streaming, and there could still be some upside to my own estimates as I'm anticipating deceleration in subscriber additions internationally just when Netflix is ramping up services in broadband heavy markets and is mulling expansion into China in 2016.
However, I don't anticipate profits to improve by much, and in fact small losses become more probable as Reed Hastings mentioned on the quarterly earnings conference call that they're considering further rounds of raising capital via corporate debt auctions. The loss of cash through declining FCF metrics will force Netflix to raise capital in future quarters, but again, the need to raise more capital seems reasonable in light of expansion costs in emerging markets.
To conclude, I continue to reiterate my strong buy recommendation on Netflix, as it remains one of my best investment ideas.