Where will Netflix be in 5 years? – The crazy fool

Netflix (NASDAQ: NFLX) has mystified the market throughout its history.

The streaming service has risen nearly 30,000% since its IPO in 2002, but the action has not always been successful. It crashed in 2011 during the "Qwikster debacle" when the company separated its streaming services and DVD services by mail. Even today, the headline has many critics who think it's overvalued and say that its model, which currently relies on burning billions of dollars in cash, will eventually collapse.

Netflix 's competitive position still seems to be changing, and today it' s no different. With the competition of the likes of Apple and Disney (or even AT & T following the acquisition of WarnerMedia), the supremacy of streaming no longer seems to be guaranteed. Where will the company be in five years? Let's take a look in the crystal ball.

Subscriber growth

Although the Netflix stock price has never been easy to predict, the company's business model is simple. Most of its revenue comes from the sale of subscriptions to its video entertainment service. The future growth of its business therefore depends very much on the increase in the number of subscribers.

Netflix completed its global expansion plan in January 2016, but growth in the number of subscribers has continued to accelerate, improving every year since the launch of the streaming service in 2011, with nearly 30 million members added. According to the company's second quarter forecast, this rate is expected to exceed this rate in 2019.

Naturally, Netflix's subscriber growth will reach a certain peak, as the market for addressable addresses is only very important. In the United States, annual growth in the number of subscribers actually peaked at 6 million in 2014, and has generally fluctuated between 5 and 6 million since. However, in 2019, this figure seems to slow down, with the company only having to recruit 2 million national members in the first half of the year. Netflix has also reached the bottom of its long-term target range of 60 to 90 million US subscribers. At its current rate, the number of Netflix subscribers in 2024 seems to be between 75 and 85 million. This would result in annual growth of 3 to 5 million subscribers over the next five years.

The growth in the number of international subscribers is more difficult to predict. Last year, Netflix added nearly 23 million international members, and growth outside the United States accelerated in 2019, with 12.6 million new members expected in the first half of the year. While Netflix is ​​devoting more money to producing foreign language content for the countries it serves, international growth should continue to accelerate, but will eventually reach a saturation point in the market (as in the US) . As a result, Netflix will experience annual growth of 25 to 30 million international subscribers over the next five years and will bring the company between 217 and 267 million subscribers outside the United States in 2024.

Price increases

With the growth in the number of subscribers, price increases are a key factor in Netflix 's business figure. In the first quarter, Netflix's monthly average subscription price (ASP) in the United States was $ 11.64 as the company was deploying price increases. Outside the United States, ASP is $ 9.32, although some of these subscribers are also seeing their prices climb.

Based on recent history, Netflix is ​​likely to pass on one or two price increases over the next five years. Expecting a price increase of 20% to 30% therefore seems reasonable. Starting from the $ 13 monthly price currently offered by the US standard package, this would mean that the annual US ASP would reach $ 187.20 to $ 202.80 dollars by 2024. Internationally, using the current ASP of $ 9.32, the annual price would rise to $ 134.16 to $ 145.44 over the next five years.

Using the figures above, the chart below shows how Netflix's revenues could look like in domestic and international markets, based on the most adverse, medium and optimal scenarios.

Source: Author's calculations

Source: Author's calculations

Combining these numbers, Netflix's revenue in five years would be $ 43.1 to $ 56 billion, a compound annual growth rate of 21% to 27.5%.

The costs

Negative free cash flow has become a concern for investors as the company expects a negative FCF of $ 3.5 billion this year, after a loss of 3 billion FCF last year. This means that the company had to incur considerable debt to fund its production of original content. However, Netflix is ​​now expecting 2019 to be the bottom of its negative free cash flow and see its margins improve every year starting in 2020. This means that it should be positive in free cash-flow by 2024 and probably substantially if its spending trays in content.

Netflix has spent $ 13 billion in cash for streaming content, and that number is also expected to grow strongly this year. By 2024, spending on streaming content of $ 20 billion to $ 25 billion seems reasonable because it will slow down. In such cases, spending in areas such as marketing and wages may also slow down. Netflix's costs are more difficult to predict than forecasting revenue, because the company has better control over its expenses. However, profitability is expected to increase as the subscription model should naturally generate wider margins as more and more subscribers join the service. As long as Netflix slows spending growth in content, profitability is expected to increase significantly over the next five years.

Other factors

Netflix does not work in a bubble, of course. The company is facing increased competition and the success of these competitors could dampen the growth of the company, even if management has been correct in terms of its overall resilience. In the same way, Netflix will have to continue to create quality content and to make sure that its subscribers know it, because competition for the eyes is growing.

While Netflix's business now relies almost entirely on its subscription video business, the optionality perspective remains. Netflix could enter new business segments, such as movie theaters, sports or video games, that can generate new revenue streams. Similarly, as the company produces more original shows, the potential is also there to generate additional license revenue from items such as toys and theme park rides, at the same time. Like Disney. Netflix has already made arrangements to allow some of its original content to be iqiyi, a Chinese streaming service, represents a way to rely on the huge Chinese market.

Nobody really knows where Netflix will be in five years, but what we know today is that its international business is booming, that its presence in the competitions is growing stronger every year and that society has a considerable advance on incoming competition with 150 million global subscribers to its service. This kind of momentum, combined with its powerful subscription model and untapped growth options, offers a promising image for Netflix in 2024.