Vanquishing markets in April 2013, Netflix has been on a stream recently. After releasing their Q1 numbers on March 31st and got higher than expected revenues, investors and markets got suddenly excited about the stock. Moreover, we’ve seen that their new programming is amassing a lot of praise from critics. House of Cards, one of their original shows is forecasted to win a number of Emmys, and Arrested Development will probably bring down the Internet for a few hours when it comes out in May.

 

Now let’s look at some numbers. Netflix has added 3 millions of account holders to its data base (2 millions in the US and 1 million abroad) in the past months, restoring their famous membership video service to yielding profits and catapulting its stock up to 25% in following hours trading on April 23, 2013. In addition, despite the fact that many people are still very suspicious about their “nascent” international branch, I believe it will certainly positively affect their reputation and boost their number of subscription as there’s no such thing as Netflix in Europe. They launched Canada in September 2010, and it is already profitable for them, and still growing at a constant pace. They also launched Latin America in September 2011, UK and Ireland in January 2012, and 4 Nordic countries in October 2012. They are growing membership in all of these markets, and as they announced will launch a new market (probably mainland Europe) in the 2nd half of 2013. Also, Netflix is the top performing stock in the S&P 500 this year, up 132%. It’s already the top S&P stock since the market’s quondam pinnacle in 2007.

To go back on the US, an important point to look at is what content is dominating the internet and television there. For the moment, it is Netflix. During peak periods of internet use in the US, Netflix account for 33% of all downstream traffic. That’s more than Google’s YouTube (14.8%), BitTorrent (5.9%), Apple’s iTunes (3.9%), Amazon Video (1.8%), and Facebook (1.5%), amid others websites. However Netflix is not as supreme in mobile internet operations, where it has just 2.7% to YouTube’s 31%, but that’s the next challenge they’ll have to face as well as their international extension.

 

What makes Netflix a big player on the Internet? Well, the company has roughly 30 million U.S. members plus another 7 million members abroad, so 37 million in total (including free trial members), which we think is putting the company on track to attain between 40 and 50 million members by the end of this year. Now, let’s say that an average monthly $10 Average revenue per user (to keep the number easy) upshot a monthly $370 million of forecasted revenue, or annually of  $4440 million by year-end, we believe that applying a 25% EBITDA (Normalized cable television network), would suggest a normalized EBITDA of $1100 million.

For the moment Netflix has a Market capitalization of $12000 million and net cash of $459.5 million, summing the total enterprise value to $ 11540.5 million. Then when dividing the TEV by the gauged future EBITDA of $1100 million, it suggests a 10,5 TEV/EBITDA trading multiple.

As most media companies trade within the ambit of 8 to 12 times, Netflix is not an outlier; given Netflix’s competitive conditioning and focus, it is likely to assume that it could trade up to the higher end of the multiple range.

So now, is it possible that Netflix achieves $1100 million in EBITDA?

If Netflix is adding back the approximately $500 million of content amortization which has been reported in the first quarter of  2013 to the $31.8 million in operating income, and annualizing that number actually puts the company on the way to trigger an annualized run rate EBITDA of over $2000 million, then we can say yes, Netflix has some room to operate.

Last but not least, Netflix also recently made an announcement regarding a new $11.99 per month plan that will authorize four video streams from a single account at the same time. At the moment, the limit for the basic $7.99 account is for two streams at the same time. We think this will also attract a lot of new users, as it gives a broader range of “action” in terms of movies being watched by several people from one account.

So we suggest going long the stock and hold.


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