Netflix’s valuation is a hot topic, constantly debated by investors and analysts alike. Subscriber growth, particularly outside the U.S., has fueled Netflix’s revenue expansion for the past decade. This growth necessitated significant investments in content. This analysis estimates Netflix’s current Discounted Cash Flow (DCF) equity valuation to be approximately US$100 billion. This valuation hinges on two primary drivers: the potential for increasing international subscription prices and the annual content expenditure required to attract and retain its subscriber base.
Netflix Subscriber Metrics: The Key to Growth
Netflix’s expansion strategy has heavily relied on international markets, proving highly successful as it has already achieved saturation in most U.S. households.
Over the past decade, Netflix has effectively doubled its average revenue per subscriber in the U.S. by implementing price increases. However, in international markets, the focus remains on expanding the subscriber base rather than prioritizing higher revenue per subscriber.
Looking ahead, Netflix’s capacity to increase pricing in international markets without negatively impacting subscriber churn will be the main factor driving revenue.
Netflix Content Spending: Balancing Act
Netflix has historically invested heavily in content creation and acquisition. Before the COVID-19 pandemic, Netflix reinvested, on average, 90% of its streaming revenues back into content annually, encompassing both original productions and licensed titles.
Post-COVID, a shift has occurred, with Netflix decreasing content expenditure, simultaneously growing revenues, and increasing free cash flows.
Since the onset of the COVID-19 pandemic, Netflix has increased pricing per U.S. subscriber by nearly 50% while simultaneously cutting global content spend per subscriber by 50%. The key question is: How long can Netflix maintain this strategy before it begins to negatively affect subscriber numbers?
Despite its extensive library, Netflix’s original content often lacks the enduring brand recall and rewatch value associated with Disney’s catalogue or iconic shows like “Friends” and “Seinfeld.”
Comparing Disney’s “Frozen” (with a $150 million budget) and Netflix’s “The Gray Man” (with a $200 million budget) illustrates this point. While Netflix movies may experience significant initial interest, they often struggle to maintain long-term attention.
Netflix DCF Valuation: Projecting Future Worth
The estimated DCF equity valuation of US$100 billion for Netflix is based on the following base case assumptions:
- Subscribers: Growth from 261 million to 376 million between 2024 and 2034, primarily driven by international expansion.
- ARPU (Average Revenue Per User) Monthly: Conservative growth from $11.9 to $15.0, influenced by a larger proportion of lower-income international markets, particularly in India, Latin America, and Asia.
- EBITDA Margins: Excluding content spend, these remain largely unchanged at 65%.
- Content Spend: An increase from a decade low of 37% in 2023 to an average of 45% of revenues going forward.
- No Other Bets: This valuation excludes potential contributions from future successful ventures such as gaming or theme parks.
Scenario Analysis: Impact of Pricing and Spending
This scenario analysis demonstrates how Netflix’s DCF equity valuation fluctuates based on ARPU and content spending as a percentage of revenue. Higher pricing combined with lower spending results in maximum value, while lower pricing and higher spending diminish value.
As of July 2024, Netflix’s market capitalization is approximately US$300 billion. This valuation suggests that Netflix has the potential to increase ARPU above $18 globally, reduce content spending to a record low of 30% of revenues, and generate an additional +$85 billion in business value beyond its streaming service.
In conclusion, determining how much Netflix is worth is a complex equation involving subscriber growth, international pricing strategies, and content spending. The future valuation will depend on Netflix’s ability to navigate these factors effectively.
