With this note we are updating our relative SaaS valuation on Netflix. Based on its prior trading history, we continue to believe Netflix should trade on a SaaS metrics basis. This involves metrics such as annual churn rate, customer lifetime value (CLTV) and customer growth costs (CGC) rather than on a traditional P/E or EV/EBITDA basis.
Earlier this week we discussed Netflix’s Q3/17 results while updating our price target of $241. We also re-iterated our buy rating on the stock.
Increasing Customer Lifetime Value – Q2 vs. Q3: We base our valuation on a CLTV / Trailing 12-month CGC. The CLTV is the gross margin the company expects to earn from each customer throughout their lifetime. The CGC takes into account sales and marketing costs as well R&D costs to make Netflix’s services more accessible to the customer. The increase in CLTV/TTM CGC from 1.1x in Q2 to 1.4x in Q3 is primarily attributable to the declining churn of Netflix subscribers. Our surveys of the U.S. pointed towards a fall in churn from 29% to 26.8% over the quarter, fueled primarily by higher US customer retention. Other factors that contributed to the higher ratio include an increased gross margin, 33.2% vs 31.7% last quarter, due to lower content costs as well and a fall in CGC from $116 to $114 from lower R&D spending.
The exhibit below summarizes the metrics.
EXHIBIT 1: Q2 vs Q3 CLTV / CGC
Source: Perspectec and Company Reports
Netflix vs. Other SaaS Companies: To provide context, the below chart compares the CLTV/TTM CGC and EV/EBITDA of Netflix to comparable SaaS companies. We take the fair value of the stock to be based on an EV/EBITDA multiple that is 100x the company’s CLTV/TTM CGC. Based on this valuation, we can see that Netflix is a Buy, moving to a Hold over the next 12 months.
EXHIBIT 2: Comparison of SaaS Metrics- Netflix vs Peers
Source: Perspectec, Company Reports.
Based on the trailing 12-months results and our survey, we believe Netflix is a strong buy then before the quarterly report. We recommend buying the shares now.
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For the purposes of complying with NYSE, NASDAQ and all Self-Regulatory Organizations, Perspectec Inc. has assigned the following rating system BUY, HOLD/NEUTRAL, SELL for the securities which are the views expressed by an analyst, Independent contractor, and or an employee of Perspectec Inc. The information and opinions in these reports were prepared by Perspectec Inc. or an analyst, independent contractor. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Perspectec Inc. makes no representation as to its accuracy or completeness.
