While many bears argue that Netflix (NFLX, Financial) is overvalued, I think the company’s valuation is justified due to the fact that it the company has a unique business that has disrupted the cable-TV market and faces very little competition. The company still has enormous growth potential in the U.S. as well as in the international market. In my opinion, Netflix’s valuation of $40 billion justified and the company can move higher as it expands its footprints internationally.
Netflix completed the first quarter of 2015 with total of 62.3 million streaming members on a global basis. The company was not into streaming a decade ago, Netflix familiarized streaming in 2007, and it had only 4.2 million DVD rental subscribers at the end of 2005. This shows how innovation can be a properly outstanding growth driver in the business realm, and Netflix is showing that it identifies how to give customers what they need.
Netflix said in its most recent earnings report that individuals streamed 10 billion hours of video during Q1. This implies engagement is at record levels, and Netflix is turning out to be the undisputed pioneer in online streaming, as well as an overwhelming player when considering both straight and online TV. As indicated by FBR research, Netflix could overwhelm the four major U.S. Telecom companies –Â ABC, NBC, CBS, and Fox –Â by crowd measure one year from now.
The company’s management team believes that it can extent between 60 and 90 million subscribers in the U.S. over the protracted term, a vital increase from 41.4 million members presently. The company is also hastening its expansion plans, targeting to grow into 200 countries by 2017 from an existing base of around 50 nations.
Expansion plans
Netflix has specified previously that the company aims to carry on growing internationally and China seems a logical option. In China, online video market cultivated 77% in 2014 and produced 23.97 billion yuan in revenues. The online market is projected to triple and reach 90 billion yuan by 2018. China consists of 649 million internet users, when calculated by the end of 2014, greatest for any country in the world.
According to the 2010 consensus lead by the National Bureau of Statistics, China had an average digit of 3.1 persons per household. By means of this figure, and supposing one connection per household, it is estimated that China has approximately 209 million internet households. About 27% of China’s internet connections have connection speeds of 4 Mbps or exceeding, the minimum speed acclaimed for streaming high definition content. It can be clearly observed that entering the Chinese online video market will be very fruitful for the company and will give Netflix access to a potential market of about 56.5 million broadband households.
Conclusion
Netflix is growing at a rapid clip and the company has a lot of room to expand. There are many untapped markets that can be potential growth drivers for the company, and it faces very little competition on the international front. In my opinion, Netflix’s valuation is justified and investors can still consider buying the stock.
