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Netflix Keeps Burning Cash, Looks Pricey

Neil Macker, CFA

Neil Macker: Netflix reported better than expected subscriber numbers for the third quarter as the company continues to outperform on both the U.S. and international segments. The company's paid streaming base hit 104 million in the quarter, up from 83 million just a year ago.

Netflix continues to burn cash, with free cashflow loss reaching $1.5 billion for the first three quarters of the year, up from $1 billion over the same period last year. Management reiterated its guidance of a loss of $2 billion to $2.5 billion for full 2017, implying a loss of up to $1 billion in the fourth quarter alone.

Netflix also revealed on the call that the content spend for 2018 will reach $8 billion, up from $6 billion in 2017. As we've noticed recently, this increased content spend will weigh not only on operating margins, but free cashflow as well over the near term. The firm also recently announced price increases for its most popular packages, the two-stream HD package, which will now be $10.99 a month, and the 4K four-stream package, which will now reach $13.99 a month. The price increases will roll out to subscribers over the next few months. We expect subscribers will continue to pay, but churn will spike and may deter potential subscribers from joining given lower prices at alternatives. 

Despite the beat on subscribers, our long-term thesis for the stock remains in place, thus we are retaining our narrow moat rating, but we are raising our fair value to $80 from $73 to account for the recent price increase. Even with the recent price increase, the stock is still trading within 1-star territory.