Consumer discretionary Netflix, Inc. (NASDAQ: NFLX)

BUY Krause Fund Research Spring 2018

Consumer discretionary

Netflix, Inc. (NASDAQ: NFLX)

April 17, 2017 Stock Rating:

BUYCurrent Price

Analysts

Sean Baloun Sean-Baloun@uiowa.edu Jared Blatz Jared-Blatz@uiowa.edu

Alec Crane Alec-Crane@uiowa.edu Matthew Fritz Matthew-D-Fritz@uiowa.edu

Target Price Current Price Drivers of Thesis

$332 $ 388.54 - 392.54 $ 336.06

Company Overview

Netflix is a media streaming service headquartered in Los Gatos, California. They were founded by CEO Reed Hastings and co-founder Marc Randolph in 1997 as the replacement to the obsolete brick and mortar DVD rental business. They made in home entertainment easy and accessible to the masses. Netflix began as a DVD delivery service at a time when VHS was the popular channel for entertainment distribution. A drastic change occurred in the trajectory of Netflix when it transitioned to online streaming in 2007. Since then, Netflix has positioned itself as the dominant player in the online entertainment industry with a global subscriber base of approximately 120 million people and growing. Going forward the company plans to maintain their competitive positioning by placing emphasis on international expansion and original content production.

Stock Performance Highlights

52 week High

$338.62

? Global markets are largely unsaturated and Netflix has the best strategic positioning to meet demand abroad with operations in 190 countries and licensing arrangements extending into China.

? We expect U.S. real gross domestic product to remain healthy in the near term and long term. Consumer confidence should remain and at high levels due to the effects of fiscal stimulus. This should result in increased discretionary spending.

? Netflix plans to invest $8 billion dollars in original content in 2018 alone in order to penetrate foreign markets. The investment will help secure their competitive positioning within the industry.

? Netflix is the first ever public firm to create a business model entirely dedicated to implementation and improvement direct internet streaming services.

Risks of Thesis

52 week Low Beta Value

Share Highlights

Market Capitalization Shares Outstanding Next Est. EPS (2018, Q2) Forward P/E

Company Performance Highlights

Operating Margin

$138.26 1.78

$127.57 Bln $433.95 Bln

$1.15 186.91

? Netflix currently has a Price-to-Earnings multiple of 268, which is three times the size of competitors Disney and Time Warner. The market may currently attribute too much expected aggregate industry growth to Netflix.

? International consumers are less likely to subscribe to multiple subscription services making competition abroad fiercer than competition at home. If competitors secure members before Netflix the firm may not realize the full growth potential priced into the current valuation.

One Year Stock Performance

ROA

10.24%

ROE

14.55%

Sales

$5.55 Bln

Financial Ratios

Price-to-Earnings

268.85

Debt to Equity

0.39%

Source: FactSet2

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Macroeconomic Outlook

Real Gross Domestic Product

Real gross domestic product is the value of all finished goods and services produced in a country over a period of time. This metric is often used to indicate the health of the economy. Real GDP increased at a CAGR of 3.16% and 2.89% in quarters three and four of 2017.3 These values are relatively strong compared to the average 10 year CAGR of 2.11%.2 As reflected in the graph below, consumer spending currently accounts for roughly 70% of real GDP. We expect consumption as a percentage of GDP to remain at current levels for the foreseeable future. Because of this, we view changes in real GDP as the strongest indication of the direction of the consumer discretionary sector. Though declining growth in real GDP may negatively affect the consumer discretionary sector as a whole, the subscription based business may be an exception. People have the tendency to hold onto subscription services in during economic downturns.

Investment and Production

The Institute for Supply Management (ISM) comes out with a report each month detailing the month to month activity of the private sector economy.11 They create the PMI index which shows what the demand for producion is in America by tracking variables such as output and new orders. Demand for manufacturing increases when companies and consumers have more money to spend on inputs and household items. Typically, a reading grater than 50 signals increased economic activity. The PMI hit a 5 year high of 60.8 in Febrauary 20185. Current levels of 59.3 remain above last years average of 57.5. 5

PMI INDEX

Source: ISM 5

With new orders, production, and employment still growing,, we expect levels to remain elevated at 58-60 throughout 2018. The optimism surrounding ISM is a good sign for business. More money will travel throughout the economy in the coming year and in the pockets of households.

Source: FRED 3

Forecast

The FOMC's median forecast for 2018 real GDP is 2.7%, followed by a gradual decrease to 1.8% in the long run.4 We view this forecast as overly pessimistic. As a result of increased investment, low unemployment, and projected wage gains, we expect real GDP to be 3% in 2018. We assume economic growth will gradually decrease over the next 3 years, reaching 2.0% by 2021.

Our optimism is primarily driven from the stimulus we expect corporate and personal tax cuts to provide. In January 2018, the current administration enacted a tax overhaul reducing the corporate tax rate from 35% to 21% and reducing personal income taxes across the board. We expect the lower tax rates will increase investment in the U.S. and supply households with more discretionary income. In the long term we view interest rates and a gradual decrease in consumer spending as the primary contributors to the decline in real GDP growth.

Unemployment

The unemployment rate is the percentage of unemployed persons in the labor force. A healthy rate of natural unemployment is considered to be 5%.43 Since the finiancial crisis the unemploymenr rate has decreased from 10% in 2010, to a current rate of 4.1%.6 The economy has been gaining momentum and we view recent tax cuts will be a positive stimulus to an already thriving business environment. Companies such as Apple have promised to create 20,000 new jobs,7 and foreign companies are increasing greenfield investments in the United States.8 In consideration of the expected increase of economic activity in 2018 we expect unemployment to hit 4.0% this year. As unemployment decreases further there will be an increased number of people receiving a stable income and thus more people buying services such as Netflix.

Wage Gains

Contrary to the positive rhetoric regarding unemployment levels, the downward pressures on wages from the recession of `09 have remained throughout the recovery. In quarter 4 of 2010, year over year nominal wage growth was 2.5%. In quarter

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4 of 2017 it was 2.4%.9 These growth rates are small relative to the 4% we were experiening before 2008.8 When workers are not getting large increases in pay they are not encouraged to increase their spending. However, we have just begun to see some upward pressure on wages and thus increased space for discretionary spending. This can be seee in the graph below. Personal income has increased for the fourth straight month at 0.4%3.

0.600% 0.500% 0.400% 0.300% 0.200% 0.100% 0.000% -0.100%

Personal Income Growth

Source: FRED 3

Given the increase in investment, tight labor market, and current phase of the economic cycle, we expect monthy personal income growth to be in the range of 0.4% and 0.6% throughout 2018. The stability and growth in wages will give consumers confidence in their spending habits and find themselves more willing to use money for discretionary spening.

Consumer Sentiment

Consumer confidence is a survey index that measures the public opinion on future business conditions, income growth, and job availability.11 The consumer confidence index is a key indicator for the health of the consumer discretionary sector. With a more confident consumer comes a greater willingness to spend. Historically, consumer confidence increases during expansionary periods. Consumer confidence hit an 18 year high of 101.05 in February, 2018 followed by a slight decrease to 97.8 in March.11 We attribute the decrease of confidence to uncertainty surrounding trade negotiations with China. The threat of a trade war would mean increase costs for business and higher consumer prices. However, recently Chinese President Xi Jinping has announced plans to ease capital controls on directforeign investment.42 We expect the consumer confidence index to rise in the near term and remain at approximately 101.0 throughout 2018.

Source:: OECD12

Capital Markets Outlook

A relatively new occurrence within the markets is the rise in volatility. A 20% drop in the VIX shook the markets on February 6, 2018 and since then stocks seen a greater level of volatility. We feel volatility will remain a factor as long as the current administration retains its protectionalist position on economic development causing disruption to a historically stable domestic balance of payments. Furthermore, we expect uncertainty surounding the expected probability of interst rate increases to facor into market volatility. As interest rates rise so will the attraction for fixed-income instruments. We expect large sums of liquidity to transfer from equities to fixed income securities as interest rates increase.

However, we viewItnhids uvoslattriylityAasnnaolrmyasliizsed.

Industry Synopsis

GICS classifies Netflix as an Internet & Direct Marketing Retail firm. Online media streaming is one of the features of the continuously evolving information technology era that we are a part of. Streaming began with YouTube in 2005. The streaming space has evolved rapidly with Netflix being the first company to stream television shows and movies online in 2007. Increasingly, convenience and immediate satisfaction is becoming a demand from consumers. The internet and direct marketing retail industry is catering to that norm. We have seen an exponential adoption of online streaming services due to their accommodative and innovative nature. For example, viewership is enhanced with the unison of more than one device. Consumers can quickly stream content through content through PC's, televisions, and smart phones as long as they are connected to the internet. User experience is another feature the industry focuses on as a way to disrupt the entertainment industry. Unlike traditional television, online media streaming companies utilize the data they have on you to provide you with an optimal set of choices when deciding what to watch. Accessing entertainment through the internet was a trend that is now becoming a norm.

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Internet Trend

More and more consumer are cutting the cord and opting instead to for direct internet streaming. The shift to the internet is a tremendous threat to traditional television networks. The below tells the story of the customer gains and losses for cable companies in comparison to gains for online streaming companies such as Netflix, Hulu, and Amazon Prime.

Year

Pay TV Gains/Losses

Internet Gains

2012

170,000

2,000,000

2013

-100,500

2,600,000

2014

-125,000

3,000,000

2015

-385,000

3,100,000

2016

-795,000

2,700,000

2017

-1,495,000

Source: Leichtman Research Group 13

2,100,000

However, traditional television still has an established position in the U.S. This can be attributed to an increasing hesitance of older generations to cut the cord. The below represents consumption habits by age.

Revenue Streams

The two primary streams of revenue are subscription payments and advertising. The subscription based model is becoming increasingly popular. Usually, companies within the industry structure their services in such a way that consumers pay a fixed fee at various price levels based off how much they want to get out of the service. For example, Netflix offers a base rate that allows you to lets you stream TV shows and movies from Netflix on one device at a time in standard definition whereas its gold membership gives you access to lets you stream TV shows and movies from Netflix on four devices at the same time and in high definition. Companies can also chose to receive revenue from streaming advertisements. 2017 was the first year that digital advertising spending was higher than traditional TV. This reflects the increase in popularity of the industry and we expect companies that show ads such as Hulu to leverage this trend.

Distribution of advertising

50.0%

spending in the U.S

40.0%

30.0%

20.0%

10.0%

0.0%

2010 2011 2012 2013 2014 2015 2016 2017

Digital

TV

Source: Statista9

Source: Statista14

A relatively new revenue stream is original content production and licensing. The move for Netflix to license out Narcos to Univision in 2017 was the first of its kind. Additionally, Netflix intends to utilize this strategy as a means to access the Chinese market.30 We expect this large growth of this revenue stream for the industry moving forward especially as a means to access the Chinese marketplace.

Approximately 50% of adult's age 18-44 claim to use streaming services more than they do traditional TV. That number decreases to the 13% ? 27% range for adults ages 45 and older. We expect the internet streaming to be the primary source of entertainment for adults age 18 ? 4, increasing the percentage of those who use streaming more than traditional to 90% by 2025. We feel adults age 45 ? 64 will be late adopters and increase their willingness to stream more than watch traditional to 50% by 2025. Lastly, baby boomers are traditional and have their habits established by now. We expect a very slow shift of this demographic towards internet streaming.

Competitive Landscape

Through first mover advantage, Netflix has a strong foothold within the industry. As online streaming has grown in popularity, the level of competition has increased. Below is a graph showing the popularity of the various players in the media streaming industry that have entered the market since 2007. Given performance, size, and scope; we view Amazon and Hulu as Netflix's primary competitors. HBO GO requires a cable subscription and is therefore not relevant to our industry analysis.

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Source: Statista14

Competitors

Recognizing the streaming trend, Amazon created Amazon Prime Video in February 2011. Since then it has made its way up to second place on the totem pole with an estimated 44 million subscribers.15 Members have access to Amazon Primes streaming library for $12.99 per month or $99.00 per year. Amazon's streaming service is bundled with the Amazon Prime membership in 16 countries. This can be seen as an advantage in that customer acquisition and data retrieval comes easy due to Amazon's large presence in areas other than streaming. Furthermore, Amazon has $20 billion cash sitting on their balance sheet which can be used for expanding prime video to additional countries. In 2017, Amazon Prime Video received a greater number of views than Netflix within Germany, India, and Japan.15 The narrative that Amazon shakes up any industry it enters stays true in media and entertainment.

Hulu differentiates itself in its focus on television shows. Their show, The Handmaid's Tale was the first online streaming service series to win an Emmy for outstanding drama in 2017. They have also recently rolled out their new live television streaming service, an attractive feature for sports fans. Never the less, they still lag behind Netflix and Amazon. This can be attributed to the fact that it is only accessible in the US. Furthermore, Hulu did not have an ad free business model for a while, a move that could be attributed to their lack of capturing more market share. Hulu has recognized the distaste for ads and offers an ad free option for $11.99. However, Netflix is add free and has a baseline subscription for $10.99.

Differentiation

The value proposition within the industry is content quality and user experience. The type of content that is delivered is either licensed or originally produced. Thus, exclusivity of content

plays a large role in differentiation. For example, the show Atlanta can be played on both Hulu and Amazon Video. Whereas Netflix has exclusive licensing deals with Marvel. This is an advantage because Netflix now has exclusive access to a specific market of marvel fans. Contrary to licensing content, Original production is a strategy companies can utilize as well.

Original production can be seen as a way to differentiate your content and also establish a new revenue stream. For example, in 2016 Netflix licensed out it's originally produced show Narcos. With greater quality comes more attention to your service.

User experience is another area that companies want to outperform their competitors in. Companies work hard to make an aesthetically pleasing and smooth interface for users scrolling through entertainment options. They also work hard to ensure the entertainment options provided will be ones the user might want. Thus, the ability to collect and logically implement data is a key differentiator in the industry.

Forecasts

We expect Amazon to continue gaining ground as it acquires customers by expanding prime video into additional countries. This could adversely impact Netflix. For example, an Amazon Prime member who receives video streaming services may find purchasing Netflix unnecessary because of the similarity between the two services. Specifically, developing nations have less money to spend on discretionary services and therefore may opt to choose either Netflix or Amazon, but not both. Provided Amazon has such a large amount of cash and intends to continue expanding its streaming service globally, we expect demand and costs of licensing content to increase.

We expect Hulu to lose market share due to a lack of competitive advantage. Their ad free subscription is $11.99 which makes it approximately 10% costlier than Netflix's base rate subscription model. Netflix increased their price in 2017 yet gained more subscribers than Hulu. Furthermore, Hulu only has a domestic presence and has yet to successfully make steps toward international expansion. This decreases their profitability in a business model built on efficiencies found from accessing vast economies of scale.

Porter's Five Forces

Rivalry among Existing Competitors: Moderate

There is a greater concentration of firms in this industry meaning that a small number of firms own a large market share, which reduces competition. Netflix is the current leader in market share, followed by Amazon Video. Market share is relatively stable due to negligible switching costs between competitors for consumers in developed nations. For example, American consumers are willing to purchase both a Netflix and an Amazon Prime Video account. The industry is under capacity as a result of recent expansion into global markets, resulting in increasing pricing power. 2017 is evident of this as Netflix increased prices by 10% while at the same time increasing the number of subscribers.

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Firms such as Netflix must take into account the fact that they are not the only company in the industry expanding into unsaturated markets. These markets are the last to be entered on account of their poor internet infrastructure and accessibility. Therefore, consumers in these markets are less willing to purchase two subscriptions. As media streaming becomes more popular across the globe, companies will compete to have first access.

Threat of Entry: Moderate

It is difficult for firms to enter this industry because it requires economies of scale, with brand recognition being a primary catalyst to expansion. It would be difficult for firms to incentivize a consumer to add a fourth subscription or chose their services over already well established firm such as Amazon, Hulu, and Netflix. Additionally, new entrants would require access to capital to purchase exclusive content rights. It is costly for Internet & Direct Marketing Retail firms to access capital because the market is dominated by few major players. However, firms like Disney with a loyal consumer base and access to a capital have the resources and the reach to establish their own set of consumers.

Firms that produce original content are exposed to many risks including exorbitant production costs, ongoing guild payments, talent costs, seller negotiation costs, and consumer acceptance of the content. These firms compete in a global market which requires detailed analysis of multiple consumer bases, which is very costly.

Catalysts for Growth & Change

Global Expansion

Netflix has forecasted the point at which the domestic market will be saturated to be between 60-90 million subscribers. There are currently 54.75 million subscribers domestically which has caused Netflix to place an emphasis on global expansion. Netflix has expanded operation abroad in all developed nations. In recent years, developing countries have seen improvement in internet infrastructure leading to untapped demand for streaming content. The table below reflects internet usage across the globe.

Threat of Substitutes: Moderate

Firms compete on the basis price for exclusive rights to stream content assets. The rights to stream a content asset are typically 2-5 years in length at which point the exclusive privileges to stream end and the contract goes up for bidding. This makes it difficult for firms to maintain a differentiated product.

Source: International Telecommunications Union16

Furthermore, the availability of pirated content on the internet remains a significant threat to the industry. Consumers put their computers and themselves at risk by streaming pirated content. However this threat remains as long as consumers' value of immediacy outweigh the costs associated with pirating content.

Power of Buyers: Low

Consumers do not have bargaining power because prices are reasonably inexpensive. Many consumers even maintain multiple streaming services for this reason. There is a certain amount of inertia when it comes to subscription models. Similar to a gym membership, when you sign up you keep it.

Power of Suppliers: High

The nature of content license arrangements are not always identical. Suppliers have the ability to adjust the duration and exclusivity of individual licensing arrangements as they see fit. This means that suppliers are able to charge higher prices for exclusive rights and longer contracts. Suppliers often maintain the rights to withdraw the content rights on short notice. Firms compete on the basis of price for streaming rights to content assets, making licensing all the more expensive. Once a contract expires, firms must spend time and resources to determine whether or not it is beneficial on a cost basis to renew the arrangement.

Developed areas like North America have already contributed substantially to the industry's growth. For example, 95% of North America's population uses the internet. Contrast this with the region of Africa where only 35% of the population uses the internet. There is potential for large untapped markets if positive strides are taken such that internet use increases across the globe. New developments like the implementation of African Undersea Cables improve transmission speeds and internet infrastrucure.17 With improvements like this in developing countries, the industry will continue to benefit from an expanding consumer base. Cisco Forecasts global IP traffic to reach 3.3 ZB by 2021, a 75% increase from 2016 levels.18 We feel the world recognizes the necessity of internet and expect global internet penetration rates to increase to 95% by 2027.

Netflix experiences exponential growth rates upon entering these countries. For example, in 2015 Netflix expanded operations to Japan, Australia, New Zealand, Spain, Portugal, and Italy and achieved a year of year growth rate of 49.3%. In 2016 Netflix expanded to the rest of the world achieving extraordinary growth in international revenues of 64.4% and 58.5% in 2016 and 2017 respectively. Because the global expansion was only two years ago we believe international revenues will maintain an average level of roughly 43% over the next 3 years. After this point the growth rate of international revenues will decrease gradually and reach a continuing value of 5%.

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Original Production

Firms in the internet streaming space have placed an increased focus on original content production as a means of maintaining their competitive advantage. This change is in part due to the competitive nature of content licensing arrangements. For example, Disney intends to pulls it's content from Netflix and launch a streaming service in 2019.28 Netflix has dedicated $8 billion dollars toward original content production in 2018 alone.29 This strategy not only protect firms from actions of their competitors but also provides value to their customers.

Original shows such as The Handmaid's Tale produced by Hulu and The Man in the High Castle produced by Amazon Video have received IMDb scores of 8.6 and 8.1 respectively. These show not only received fantastic are what brings awareness to the firms that produce the content. These successes lead us to believe that firms will continue to use original content production as a major part of their business strategy.

Furthermore, the introduction of in original content has presented the industry with the opportunity to engage in content licensing as a means of additional revenue. Through licensing arrangement firms such as Netflix are able to access restricted markets such as The Peoples' Republic of China.30

Net Neutrality

The roll back of Net Neutrality the FCC recently imposed has created a lot of conversation surrounding the industry. Net neutrality essentially means that ISP companies cannot favor one company over another and must provide equal access to content online. With the rollback, ISP companies could possibly charge more for faster service or "priority lanes" of connection. The consensus is that a higher charge for the priority lane will be directly swallowed by the end service. It is doubtful that the future will have an absolute negative effect on the leading ISPN customers such as Netflix. Netflix's size give it plenty of leverage to negotiate with ISP providers.

Netflix has the largest subscriber base of 120 million followed by Amazon Prime with 100 million. Brand recognition and word of mouth play an important role in the addition of new subscribers making it easier for Netflix to capture untapped market share. The industry requires are amount of fixed costs and small marginal costs resulting in beneficiary gains from economies of scale. There is essential no direct cost to onboard an additional subscriber.

Subscribers per title

12000 10000

9322

10000

8000

6000

4000 2000

2588

0 Netflix

Hulu

Aamzon Video

Source: Finder31

Amazon Video has the largest content library followed by Netflix then Hulu. For every title that Amazon pays to either produce or stream they have 2,588 paying subscribers. At this level, Amazon has too much content per subscriber. Therefore a reduction content library may benefit Amazon by reducing content cost without the loss of subscribers. We expect subscriber per title to remain at current level for Netflix as they create more content as a means of capturing international subscriber. Hulu has yet to make concrete steps toward international expansion so we expect to see a decrease in subscribers per title in 2018 and onward. We believe that Amazon uses the Prime Video Service as a means to increase prime memberships and is therefore willing to generate losses. Therefore, we expect the metric to remain at current levels.

Key Metrics

Netflix is the only public firm operating entirely on the internet direct streaming platform. We identified comparable firms as those which provide streaming services via the internet.

Number of subscribers (Million)

140

120

120

100

80

60

40

20

0

Netflix

44 17

Hulu

Amazon Video

Ticker

Price

AMZN 1,479

EPS 2018E

8.40

P/E 18

BV Equity

175.98 57.25

PEG 18 733.24

DIS

101.81

6.99

14.57 28.86

132.49

TWX 96.68

7.64

12.66 36.38

126.57

Average 542.61

7.68

NFLX 332.00

1.29

Source: FactSet2

70.19 40.83 257.9 8.27

330.768 364.0

EPS

Earnings per share (EPS) is calculated by dividing net income less preferred stock dividends by the weighted average number of diluted shares outstanding. An earnings lower that industry average are indicative of firm in the growth phase. We see this with Netflix as they continue to employ a substantial amount of resources to marketing and content as they expand globally.

Source: Finder31

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Price to earnings (P/E) is calculated by dividing the current share price by the Earnings per share. This metric tells us what the market is willing to pay per dollar of earnings generated by the firm. Amazon and Netflix have extraordinarily high P/E ratios indicating the premium paid for expected future returns. We believe Netflix and Amazon are capable of producing the cash flows necessary to justify the current premium.

Price-to-earnings to growth (PEG) is calculated by dividing P/E over the estimated 5 year earnings growth rate. This metric tells us how greatly the market values expected growth potential. A PEG that is greater than the industry average can indicate overvaluation. Netflix's PEG is roughly 3 times the size of competitors Disney and Time Warner. The means that the market attributes the vast majority of streaming industry growth to Netflix. If competitors' growth exceed expectation their growth will come at the expense of Netflix because the market is currently pricing the majority of aggregate industry growth to Netflix. We view this as the primary risk to our investment thesis.

Company Analysis

Percent of Revenues by Segment (2017)

3%

44%

53%

Domestic International DVD by Mail

Source: Netflix Form 10-k 201720

DVD-by-mail subscribers have been dropping their subscription at a YOY rate of 18% since 2011 and they comprise 3% of Netflix's revenue. Netflix has been gradually straying away from their DVD business segment to focus strictly on streaming. This move will help to cut distribution costs.19 We expect their DVD service to continue declining and ultimately be terminated by 2027.

General information

As the pioneer of entertainment distribution, Netflix was the first to established market reach both domestically and abroad, positioning itself as a leader in the internet and direct marketing retail industry. In 1997 Netflix became the first ever DVD internet rental service, and in 1999 Netflix strategized an unlimited subscription model. In 2000 they began using breakthrough algorithmic technologies to improve upon the user recommendations of their model. In 2007 Netflix became what we know to be today, a streaming service. As of December of 2017, they have 120 million subscribers across the globe. They are recognized not only for their licensing capabilities with exclusive access to movies such as Dave Chappelle's stand up special, but also their producing capabilities with Emmy award winning shows such as The Stranger Things. Netflix's content experience service commands the largest domestic and international presence among its peers in an industry that still has room for exponential growth.

Business Segments

Netflix operates three business segments which include; International Streaming, Domestic streaming, and DVD-bymail. The following graph represents the composition of Netflix's revenue. As of December 31, 2017, Domestic and International make up the at 53% and 44% revenues respectively.

Percent of Revenues by Segment (2027E)

23% 77%

Domestic International

Source: Netflix Form 10-k 201720

As the segment leader in revenue and once the only streaming segment on Netflix's financials, domestic streaming plays a core role in Netflix's long term strategy. However, we believe in 2027 Netflix will primarily grow their domestic revenues by pricing as opposed to subscriber additions. Reed Hastings has predicted that the market for media streaming in the US is 6090 million people.33 With 54 million domestic subscribers, 2017 marks a year that brought Netflix closer to that saturation range. We predict Netflix will reach 88 million domestic subscribers by 2027.

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