This media/entertainment company is forecast to grow by 64% next year, and 16 analysts have increased their earnings estimates for the company in the past 30 days.
Netflix, Inc. (NFLX)
From Canaccord Genuity Research
Netflix, Inc. (NFLX) stock sold off with the rest of the technology sector heading into the end of 2018, but has rebounded ~50% since then, first on content strength coming out of the Golden
Globes, and then on price increases which suggest strong pricing power.
The company’s Q4 results largely built on these strengths, with very strong international net adds and positive viewership data around key titles. One area for close observation is domestic
subscriber growth, which has been steady at lower levels but could face modest pricing-related headwinds in Q2 before rebounding in 2H. That said, we are strongly encouraged regarding our investment thesis, which revolves around a rapidly expanding catalog of original content driving continued strong subscriber growth.
While the stock has rebounded sharply, it is still ~15% below highs reached last summer, but now in the context of a steadily improving business.
Key points:
• User growth carries into 1Q, aided by international: Subscriber momentum continued in Q4, although strength tilted firmly overseas, with international paid net adds of 7.3M coming in nearly 20% ahead of our expectation. Domestic paid net adds of 1.5M slightly missed consensus, and the level of new additions continues at a moderate pace, as penetration levels mature. International growth was broad-based in Q4 and continues to be supported by the secular tailwinds of increasing broadband access and burgeoning interest in on-demand forms of entertainment. Content spend also continues to be weighted internationally, which along with lower penetration levels points to a strong long-term subscriber outlook, including 7.3M net adds expected in Q1.
• Strong content slate in Q4 should continue into 2019; gives Netflix enough comfort to raise prices domestically: Q4’s original content offering boasted more than 2 dozen movies and specials (the highest number for a quarter to date) including the award-winning foreign language film ROMA and thriller Bird Box premiering during the quarter as well as new and debut seasons of popular shows such as Narcos, House of Cards, and The Kominsky Method. This broad range of new and existing content on the platform enables Netflix, once again, to raise prices in the US without sacrificing consumer price-value proposition. This price increase in the US comes on the heels of price hikes in Canada and Argentina in Q4, and in Japan in Q3.
• Guidance points to continuation of trends: Netflix guided for 1.6M domestic and 7.3M int’l paid net adds for Q1, modestly below our prior estimate domestically, and over 10% ahead of our estimate internationally. While GAAP OI margin guidance of ~9% was below our and consensus estimates, FY19 outlook of 13% margin was reiterated, with margin expanding through the year. 2019 FCF burn is expected to be similar to 2018, when the company used ~$3 billion, and should start improving in 2020.
We are modestly adjusting our estimates. Our price target goes to $415 (up from $400), based on ~42x (unchanged) our 2020 adj. EBITDA estimate.
Michael Graham, CFA and Matthew Volpe, Canaccord Genuity Research, www.canaccordgenuity.com, January 18, 2019