Laura Martin, analyst at Needham & Company, has been explaining why Needham & Company initiates think Wall Street has undervalued the OTT giant. Martin cites three main attributes in the Netflix story
- Needham & Company believe that Netflix is the best way to play global broadband growth over the next 5 years. According to the OECD and Cisco’s 2013 VNI study, demand for internet video is set to grow at 30-90% annually through 2017. Netflix should be a primary beneficiary.
- Needham & Company believe that international markets will generally have a faster breakeven point, higher marginal ROICs, and will provide a visible growth driver for Netflix shareholders for the next 3-5 years.
- In the US, Needham & Company estimate that Netflix is the super-low cost provider at ½ to 1/10 the cost of the linear TV, implying pricing power upside potential of over 100%, through tiering, advertising revenue, add-on services, etc.
Concerning valuation, she notes: “We believe that the market is valuing Netflix at a 15x multiple of its FY14E US profitability (streaming plus DVDs) plus an option payment on international markets. Our analysis of Netflix’s aged international markets shows that each international subscriber is worth $450 at maturity in 7 years. Discounting this value back at Netflix’s WACC implies that each international subscriber that Netflix adds today is worth $260. This is consistent with today’s valuation of Netflix, and our 12-month target price of $425 extends this analysis.”