Netflix has risen 9% today on the back of some stunning numbers from their first quarter release. Let’s take a look at some of the stats from the release
- Revenue grew 43% year over year for Q1, the fastest pace in their history, but primarily down to increases in the ASP of the service
- Operating margin grew 12% year over year
- Global net additions for Q1 were 7.41 mln members, up 50% year over year and ahead of forecasts
- The company will be spending $7-8 bln in content this year
- The company generated $3.6 bln in revenue for Q1, EBITDA of $534 mln
Netflix’s market cap is now a massive $145 bln. Given that the yearly run rate of revenue assuming Q1’s numbers is $14.4bln and EBITDA of $2 bln, it is easy to think that the $145bln valuation is too high.
However, I believe that the real revenue potential of Netflix isn’t in streaming, although it’s clear that streaming will continue to generate increased revenues for the foreseeable future. I believe that the real revenue potential is in the content creation and the associated potential of spin-offs from the $8 bln of content Netflix is creating every single year.
We’ve seen before how media content can turn companies into billion dollar companies. Let’s take for instance LucasArts, which transformed Star Wars into a real franchise that included not only movies and TV shows, but also introduced several other additional revenue streams via video games & toys. Lucas Arts was acquired by Disney for $4 bln, a price many believe was undervalued.
Pixar is another example of how content can transform a company into a multi-billion dollar machine. Pixar got off to a slow start but from the early 2000s, the company began to release multiple animated films. The result? The company was eventually acquired by Disney for $7.4 bln.
Disney itself is another great example of such a transformation. The company originally began as a media company, but over the years has transformed into a company worth $153 bln today as a result of movies, television shows, theme parks, toys, video games and more.
If Netflix can indeed transform its content into serious franchises, the current $145bln valuation could be seriously undervalued and the current share price could increase significantly as the transformation of its content is slowly realized.
Of course, the road to get there may be a long one, but with Netflix’s current stats, the company does not appear to be slowing down anytime soon.
As always though, please do your own research before buying/selling this share; the opinions above are only my personal views and should not be considered as advice.
