Sterne Agee Questions Netflix's Addressable Market

Sterne Agee analyst Arvind Bhatia recently released a note reiterating Netflix’s (NASDAQ: NFLX) Neutral rating. Netflix on Monday reported higher-than-expected 2014 Q2 earnings. Q2 guidance is also above expectations.

The amount of domestic and international subscribers, streaming and revenue were all above the estimates for Q2. According to Bhatia, Netflix subscriber growth did not seem to be affected by its price increase for new subscribers.

Q3 guidance for domestic and international subscribers, streaming and revenue are all above estimates except for international revenue. Management at Netflix expect their international markets to remain on track to collectively reach profitability by Q4.

Related Link: Bank of America Raises Price Target On Netflix Following Q2 Earnings

Bhatia noted that while Netflix does have a solid business model and high expectation for strong growth in upcoming years, the real question is, “what is the company's true addressable market worldwide?"

Netflix Management has cited 700-800 million broadband households (including 200 million in China) as their addressable market. In the United States, where there are 90 million broadband households, the company has guided its addressable market between 60-90 million versus the current amount of 36 million.

In Bhatia’s five-year model, domestic streaming subs is up to 67 million from 36 million and international streaming up to 48 million from 14 million. Bhatia said, “If we assume a forward P/E multiple of 25x to 30x in 2018, it would imply NFLX shares could be worth $575-$700 in four years.”

Shares of Netflix opened at $443.83, down 1.9 percent.