Netflix, TiVo, and XM Satellite
By Jeff Fischer (TMF Jeff)
November 6, 2003
Television software service, TiVo (Nasdaq: TIVO), just surpased the million-subscriber mark, a milepost it hadn't expected to reach until the holidays.
XM Satellite Radio (Nasdaq: XMSR), which reported Q3 earnings this morning, is also celebrating the million sub mark, and movie rental service, Netflix (Nasdaq: NFLX), recently passed the mark, too, and now has 1.3 million subs.
What's interesting is how differently these subscribers are being valued by the market.
TiVo has an enterprise value of about $550 million, which values each of its subscribers at $550. XM Satellite has an enterprise value of $3.0 billion, valuing each of its subs nearly 6 times higher, at $3,000. Netflix's enterprise value is $1.3 billion, valuing its subs at $1,000 per head.
A month of TiVo costs $12.95, and though many subs pay a lifetime rate of $299 and won't pay more until their TiVo box needs replacing, we'll focus on the monthly charges that a majority pay. A month of XM satellite radio costs $9.95, and a month of Netflix is $19.95.
These figures imply that the market is valuing a TiVo subscriber at 42 months of future revenue (the company has $550 in enterprise value for each sub who pays $12.95 a month). Meanwhile, XM's share price implies that a typical subscriber today is worth 301 months of future service ($3,000 for a sub paying $9.95 a month), or about 25 years worth of sales. Netflix's share price values each sub at 50 months of future revenue, or about 4 years.
The immediate takeaway is that TiVo subscribers are relatively undervalued by the market, and XM subscribers are outrageously valued. Both companies obtain similar additional revenue up-front from product sales (the TiVo box or the XM radio), cancelling out arguments that this revenue accounts for any of the difference.
Part of the reason for the stark contrast is relative growth rates. XM is growing subscribers at a record-breaking pace, claiming adoption rates that top the Internet's early rates. TiVo's service has taken several years longer to reach a million subscribers. Netflix, however, has reached the million mark in relatively short order, too. But XM expects to double its subs to 2.4 million in 2004, while TiVo and Netflix haven't made projections that ambitious. Netflix aims for 5 million subs in 2007.
Still, even if you double XM's subscribers, at the current share price each would be valued at $1,250 at the end of next year, or a whole 10 years worth of service (before any price increases). This is a valuation "lead-time" per subscriber that even Time Warner's (NYSE: TWX) AOL never saw in its early days. Even valuing a subscriber at four years of revenue (before subscriber growth), as Netflix and TiVo shareholders are doing, is generous.
But Netflix is the only one of the three with free cash flow, and (though many investors -- including shorts -- might disagree) it looks reasonable on other valuation measures. The stock trades at 47 times next year's $1.11 pro forma earnings per share estimate, while earnings are expected to more than double.
Jeff Fischer has a stake in Netflix. |
