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Why Netflix Looks Expensive

Neil Macker, CFA

Despite Netflix blowing away its subscriber growth guidance in the second quarter, our long-term thesis remains in place, and we still see the shares as meaningfully overvalued.

Management has attributed the subscriber outperformance to excitement around original content, and it appears that the large slate of originals released in the quarter helped build subscriber interest. However, these original shows come at a cost as the firm continues to burn cash at a faster pace with a free cash flow loss of over $1 billion in the first half of 2017 versus a loss of over $500 million in the first half of 2016.

Looking ahead, we expect net new subscribers in the U.S. to decline by 18% a year from 2018 to 2021, but our projections (and consensus) may prove to be optimistic. Netflix will need to continue to ramp up its investment in original content at the expense of acquired content, possibly increasing pressure on margins and free cash flow.

All in, we're retaining our narrow moat rating and $73 per share fair value estimate.