Why is Netflix Stock so Expensive?

How to grow when the whole neighbourhood has Netflix.

Andrew Willis 18 August, 2023 | 4:17AM
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Key Takeaways for Netflix Stock:

  • The password crackdown has proven profitable for Netflix – but the benefits will fade
  • Netflix now has more subscribers outside of the U.S. than inside
  • International expansion may hamper margins

 

Andrew Willis: Netflix (NFLX) posted a solid second quarter with the addition of 5.9 million subscribers – and we’re seeing margins improve, which has us raising our fair value estimate on Netflix stock to 330 U.S. dollars from 315.

We saw most of the growth at Netflix last quarter come from Europe, which suggests North America may be a bit tapped out after the password crackdown.

Saturated Domestic Market for Netflix Stock

Senior equity analyst Neil Macker says that as the benefits of paid sharing wear off, he thinks attracting new subscribers in the U.S. and Canada will remain challenging due to Netflix’s already large presence and intensified competition.

Netflix may be moving investments from Hollywood to Bollywood as it seeks to expand its subscriber base, but investors should keep in mind that this international expansion will hamper margin expansion. Original content costs a lot of money - although by 2027 we do project a paying audience of over 300 million in India alone.

For Morningstar, I’m Andrew Willis.

bulls Netflix Bulls Say

  • Netflix's internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years.
  • Netflix has built a substantial content library that will benefit the firm over the long term.
  • International expansion offers attractive markets for adding subscribers.

bears Netflix Bears Say

  • The firm continues to burn billions of dollars of cash to create its original content with no end in sight.
  • The level of competition in the U.S. and internationally is increasing and will continue to do so over the near future. Disney+ launched its own branded SVOD service in the second half of 2019.
  • The need for increased content and marketing spend outside of the U.S. will limit the rate of margin expansion for the international segment.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Netflix Inc588.54 USD2.65Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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