Netflix (NFLX)HBO Go Concerns Holding it Back… For NowLONG, TP $450 (+16%)
RESEARCH TEAM
Parker Kim, Senior DirectorPearce Illmer, Senior AnalystJack Butler, Junior AnalystAnkit Tiwari, AnalystJon Burston, Analyst
Investment Thesis
November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain
“
Investment ThesisHBO Go and Intl Concerns Weighing on NFLX… For Now
HBO Competition and Poor Intl Growth Weigh on NFLX …but NFLX and HBO are not substitutes for each other
…While international growth is still on a strong trajectory for success
…there’s not much of a change in the competitive landscape. We and HBO have significantly different content. I don’t think there will be a significant impact at the consumer level.
-Reed Hastings, CEO on 3Q14 Call
“
Company Overview
November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain
Company OverviewNFLX Competitive Advantages Hold Subscribers In
Proprietary collection of customer viewing data to address issue of “too much, what do I watch”
Selection Quality: over 20,000 streaming titles both original and licensed content
Binge-friendly: Entire seasons available all at once, program designed to keep playing
Original content: House of Cards, OITNB draw in additional viewership
November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain
Company OverviewFinancial and Operating Statistics Overview
2010A-2016E Revenue and EBITDA ($USD mns) Revenue Growth Rates and EBITDA Margin
Subscriber Growth is Up to 50mn, Driven by Intl
NFLX is still growing incredibly fast despite news headlines that it may
be losing steam. It’s 50mn subscribers make it the largest
business of its kind.
November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain
Company OverviewReed Hastings: A Management Consideration that’s Not BS
Work Experience
Experience CEO of Charter Fund President/CEO of Pure Atria Software Chairman of DreamBox Learning Director of Facebook Director of Startup America Director of Microsoft President of California State Board of
Education MSCS from Stanford University
Management Philosophy: Freedom and Responsibility
No vacation policy – leave if you’re doing a great job and covering your
responsibilities.
Retain “outstanding” employees only. Mediocrity will not suffice.
No “brilliant jerks” – star performers that are hell to work with are sent packing.
“Freedom and responsibility” – managers give employees the right context to make
decisions.
“ “
Hastings knew DVDs were a dying business even when founding Netflix in 1997
and from the beginning Netflix has invested in software for its transition to internet.
Netflix has been a media company, not a DVD company, from the beginning, and has
been successful thanks to Hastings’ pioneering vision for industry direction.
Industry Overview
November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain
Industry OverviewGrowth Prospects for NFLX Lie in International Markets
International Subscriber Growth Projections
Latin America will drive a majority of
the growth
European Expansion Efforts Have Already Started
Recently Expanded Germany France Italy Spain Russia Poland Austria
Previously Entered Britain Ireland Netherlands Sweden Finland Norway
Potential Risks of Entry
Competition from existing Snap, Canal+ in France and Germany
French media consumption habits are focused on free rebroadcasts of network
and cable TV
But NFLX’s low price point should be able to penetrate as it did in GBR
Neither have in-house productions like NFLX which was key for GBR expansion
November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain
Industry OverviewCompetition Exists- But Little Overlap Exists and NFLX Thrives
Subscriber Base of Competition & Retention Rates HBO Go Characteristics
$15/month for online only subscription Rollout is expected in 2015 Not a Real Substitute
Premium HBO-only shows like GoT Some movie overlap but focus is on
its in-house TV-shows
Higher retention rates mean each customer acquisition has a higher return on investment and
are less risky.
Overlap of Top 200 Movies and TV Shows
NFLX200
AMZN73Hulu
27
November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain
Industry OverviewPorters 5 Forces Industry Analysis Indicates Favorable Industry
Licensing relationships for content are difficult to acquire for new entrants
Several related platforms, but in-house studios provide unique, must-have content
Content library size key differentiator
Hulu, AMZN, HBO, Showtime, Starz all offer premium content through online platforms
Differentiated content helps justify purchase
Cable TV numbers have grown slowly, but alternatives have largely fizzled out in favor of online streaming
Licensors generally enter monopoly or duopoly contracts for their shows, and bidding for key content is necessary
HIGH
LOW
MODERATE
LOW
HIGH
Porter’s AssessmentIndustry Dynamic Rationale
Barriers to Entry
Bargaining Power of Buyers
Intensity of Rivalry
Threat of Substitutes
Bargaining Power of Suppliers
Risk Overview
November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain
Risk OverviewRisks Concentrated on Continued Content Acquisition
Competition for Content Content Acquisition Weak Competitive Moat
Content creators license out content to NFLX and its competitors. Competition for popular content can lead to bidding wars or NFLX losing out which could potentially cause subscribers to leave.
NFLX’s business model is reliant on continually adding customers to grow revenue since price stays the same.
Failure to acquire quality content will lead to stagnant growth.
NFLX’s #1 subscriber base is more due to its head start rather than a strong competitive moat. Thus, NFLX must manage its customer base carefully.
Massive scale of NFLX Suppliers get benefit of
larger viewerbase
Original content production
Users don’t expect immediate new content
Content offering has been a key differentiator that will retain customers
Investment Thesis
November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain
“
Investment ThesisHBO Go and Intl Concerns Weighing on NFLX… For Now
HBO Competition and Poor Intl Growth Weigh on NFLX …but NFLX and HBO are not substitutes for each other
…While international growth is still on a strong trajectory for success
…there’s not much of a change in the competitive landscape. We and HBO have significantly different content. I don’t think there will be a significant impact at the consumer level.
-Reed Hastings, CEO on 3Q14 Call
“
Netflix (NFLX)HBO Go Concerns Holding it Back… For NowLONG, TP $450 (+16%)
RESEARCH TEAM
Parker Kim, Senior DirectorPearce Illmer, Senior AnalystJack Butler, Junior AnalystAnkit Tiwari, AnalystJon Burston, Analyst
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