By the end of 2026, we expect Netflix’s revenue to rise from $20 billion to $57 billion due to an increase in the number of streaming service users from 169 million to 389 million, as well as an increase in average per user revenue from $10.79 to $12.46. In our view, the key increase in users will occur at the cost of the ‘Asia and Oceania’ region, where the double-digit growth rates of the number of subscribers will remain on the 5-year horizon.
Netflix is an American company that owns the largest streaming service of the same name in the world, and is available in more than 190 nations. At the end of the 3rd quarter of 2020, the number of subscribers of the service is 169 million people. By selling a monthly subscription, the business raises revenue, offering access to a large base of content, including feature films, documentaries, cartoons and TV shows. A strategy for producing its own exclusive content is actively established by the business.
Due to economies of scale, we predicted an improvement in operating margin from 13% (2019) to 26 percent by the end of 2026. First of all, the marginality increase would be accomplished by reducing the share of advertisement and promotion expenses, which currently account for a significant proportion of costs, as well as by reducing the cost of depreciation of content.
In our opinion, the leadership position in the streaming market and the strategy to broaden the library of its own exclusive content would allow the business in the coming years to display high sales rates and margin growth, so we put up a BUY recommendation for a period of 1 year with a target price of $590.
On the other hand, the stock is also prone to certain risks including increased streaming competition with more companies entering into the streaming business; increase in the expense of a new client attraction to broaden its customer base as well as to retain the existing users; slowing the user base’s growth rate which continuously required luring more and more users; and most of all risk attached with currency rate fluctuations as larger part of the company’s revenue came from outside of the U.S.