Netflix, Inc. (NFLX) Gets a Bizarre “Like” From Royal Bank of Canada (USA) (RY)

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 enough growth to justify Netflix’s sky-high forward P/E of 65.

Looking ahead
Given that Mahaney expects the international business to continue losing money in the near term, and that the DVD-by-mail business is in secular decline, it is hard to make a bullish case for Netflix based on his subscriber-count projections. To justify the current share price, Netflix will need to keep growing its domestic subscriber count by at least 20% annually for the next few years.

The article Netflix Gets a Bizarre “Like” From RBC originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg is short shares of Netflix and Amazon.com. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix.

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