In the past, licensing the content would have been more expensive than the revenue from this plan, making it unprofitable. This might seem like a semantic difference, but it is a structural difference in its business model.Ī good example of this mechanic is Netflix's behavior in emerging markets, where Netflix can create ad-supported plans and lower pricing models to maximize revenue generation and increase market penetration and subscriber growth. The objective now is to maximize the value it can get for its produced content. The company's objective then was to maximize the arbitrage between the licensed content and the number of subscriptions it could obtain for that content. In the past, subscriber growth was a good proxy for the stock as Netflix licensed most of its content, creating a rigid cost structure and linear relationship between its subscribers, revenue, and margins. While analyzing the model's accuracy and results is entertaining, the story that the numbers tell is the crucial part. Overall, earnings per share are on track to deliver within the model's predicted medium range.ĮPS Actuals & 2023 estimate Vs. This segmentation has allowed Netflix to reach more people and expand its subscribers, which explains why it substantially outperformed the model's expected subscribers for 2023 of 180-230 million to the last reported 247 million while only delivering on the low range of the model on revenue. Netflix now has various pricing options to segment its plans by the number of users, quality, and ad-supported plans. However, Netflix has changed its business model enough for subscriptions not to be a meaningful proxy for its value. The subscriber growth Netflix has experienced in the past years is consistent with linear growth, and it will naturally transition to logarithmic growth as saturation increases. Ironically, the model stopped functioning to predict short-term results during the pandemic as Netflix subscribers jumped and stabilized. The model predicted that Netflix would have 371 million subscribers by 2025, which is in line with current optimistic valuations, and that its subscriber growth rate would be about 4.8% in 2030, which is the assumption of the current valuation. Time (My Charts - Netflix Is Contagious, And The Cure Is Coming) In the logarithmic phase, one subscriber would have to interact with 100 friends before finding one who does not use Netflix. In that case, there are potentially ten new subscribers that is the behavior of the exponential phase. Suppose one subscriber interacts with ten friends who do not have Netflix. The saturation of the population causes the spread to decelerate. This behavior can be segmented into three stages: exponential, linear, and logarithmic. The model, which I named "Sick Model," used the S-shaped behavior of a disease spreading into a population to predict subscriber growth. I will explain how the model's predictions compare to Netflix's past results and prospects and the three catalysts that make it a much better stock than it was three years ago when it traded at the same price. The model has had interesting results and is relatively accurate. In 2018, I began modeling Netflix ( NASDAQ: NFLX) subscriber growth using the equations used to predict pandemics and the spread of diseases.
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