Netflix, Inc. (NASDAQ:NFLX), the well-known provider of online movies and TV shows, has had an amazing last 12 months. The stock price crashed from $125 in early 2012 to a low of $53 as the company made some missteps and lost favor on Wall Street. In the fall, famed investor Carl Icahn reported he had an almost 10% stake in the company. In response, the stock price rose about 30% to around $80. Netflix also regained Street confidence with a recent better than expected preliminary quarterly result. The company announced a surprise profit for the final three months of last year, as well as the addition of 3.8 million subscribers to their video-streaming service, and the stock jumped another 40% higher on the news. The shares continued to rise as investors viewed the company’s future more favorably.
Now the investor wants to know where it can go from here. One helpful clue is an appraisal on what the company is worth. Though the shares can trade at a significantly higher or lower price for an extended period of time, eventually the stock ends up settling at a level resembling the business's fair value.
There are many methods to value a company, but one way that seems appropriate for Netflix is enterprise value (EV) per subscriber. This method basically takes the EV, or total stock market value plus long term debt, of comparable companies on a per subscriber basis and then applies an equivalent factor to Netflix.
There are four companies that might be a good comparison for Netflix: Cable TV providers Time Warner Cable Inc (NYSE:TWC) & Comcast Corporation (NASDAQ:CMCSA) and satellite TV providers DISH Network Corp. (NASDAQ:DISH) & DIRECTV (NASDAQ:DTV).
The determination of EV per subscriber reveals that for the cable TV providers, Time Warner Cable has an EV of around $56.2 billion with roughly 15.3 million subscribers meaning an EV per subscriber of $3673. Comcast, using estimated figures for their cable TV business only, has an EV per subscriber amount of $4052 based on 23.0 million subscribers and an EV of $93.2 billion.
For the satellite TV providers, DISH Network came in with an EV of $27.1 billion and around 14.0 million subscribers resulting in an EV per subscriber value of $1935. DIRECTV, with an EV of $50.5 billion and 29.6 million subscribers, has a per subscriber worth of $1706.
The data indicates that, in general and using round numbers, the market assumes reasonable fair value at $3800 per subscriber on a cable TV basis and $1800 per subscriber on a satellite TV basis. Why the big difference between cable and satellite valuation?
One major reason is the amount of revenue each subscriber provides. A cable TV subscriber generates about $400 of sales per quarter and the satellite subscriber generates roughly $250 per quarter.
Revenue per subscriber is significant, especially when assessing Netflix. The company generated sales of about $30 per subscriber per quarter over the recent reporting periods. For valuation purposes, the cable and satellite EV per subscriber amounts need to be adjusted when applied to Netflix. It would not be fair to give Netflix enterprise value credit at the same amounts as the cable or satellite providers when the company only brings in revenue at a fraction of what the other providers generate.