This entertainment giant just hit 100 million subscribers. The company beat estimates by $0.03 last quarter and is on target for triple-digit growth this year.
Netflix (NFLX)
From Canaccord Genuity Research
Netflix (NFLX) reported solid Q1 results, with revenue in line with consensus as higher ASPs offset slightly light paid subscriber adds. Key show releases being pushed into Q2 is the likely cause of the subscriber miss, as new seasons of top shows historically have had larger impacts on net adds than new shows.
With the valuation becoming fuller (NFLX is up ~19% vs. S&P up ~5% YTD), the trend in rising long-term profitability is important given the upfront cash spend on content. We realize it will likely take a substantial sub beat to move the stock in the short-term, but the release slate in Q2 and Netflix’s success with originals give us reason enough to remain buyers of the stock.
Bullish: Q1 domestic and international contribution margins exceeded consensus (by ~40 and ~260 bps); Q2 sub guidance was better than expected.
Bearish: Domestic and international sub net adds were below consensus (by ~80k and ~155k); Q2 operating margin guidance was below expectations.
Key points:
• Continued steady performance: Netflix reported solid but slightly below guidance Q1 paid domestic and international adds of 1.5M and 3.8M, respectively. Although this number was below our estimates of 1.9M and 4.2M, the full H1 count may end up being more in line, with inter-quarter shifts. A tough sequential comp came from an especially strong Q4, with some ungrandfathered subs rejoining, and House of Cards season 5 being pushed into Q2/17 (all prior seasons were released in Q1). Netflix guided to 0.85M domestic and 2.8M international paid sub adds, which are ahead of our prior estimates.
• Release slate and marketing initiatives can help Q2 - We believe the strong Q2 release slate, along with additional local languages (27 by the end of Q2) becoming available on the platform, should help drive subscriber additions. To increase awareness, Netflix expects to spend over $1B on marketing initiatives to enhance customer acquisition, with emphasis on programmatic channels.
• Re-focus on global revenue growth and operating margins - Management is refocusing on global revenue growth and operating margins as key indicators for progression vs. member and revenue growth and U.S. contribution margins previously.
While the U.S. business is likely to continue to fund the majority of domestic and international content, we see this as a sign that previous international cohorts are becoming more profitable while newer cohorts are ramping up as expected.
We are raising our subscriber estimates and slightly reducing our operating margin estimates. We raise our price target to $165 (from $160), based on 40x (unchanged) our 2021 EPS estimate of $7.11 (up from $6.99), discounted to the present.
Michael Graham, Austin Moldow, and Vinod Srinivasaraghavan, Canaccord Genuity Research, www.canaccordgenuity.com, 617-371-3711, April 18, 2017