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Strong Start to 2015 for Netflix, But Shares Overvalued

Netflix’s investment in original content will deliver excess returns on capital over time but that is already priced into the shares, writes Morningstar analyst Neil Macker.


 Netflix (NFLX) began 2015 with a strong first quarter by adding 2.28 million streaming customers in the United States and 2.6 million streaming customers internationally, versus guidance of 1.8 million and 2.25 million, respectively. Netflix beat our expectations for segment contribution while revenue of $1.48 billion was in line with our model. The firm continues to construct a solid foundation, ending the reporting period with more than 59.6 million global paid streaming subscribers, up from 46.1 million a year ago. We are maintaining our narrow moat rating and fair value estimate of $386 and consider the shares slightly overvalued based on a strong move up in aftermarket trading.

Netflix remains committed to investing in proprietary content which, based on past success, we believe will deliver excess returns on capital. Highlighting the importance of investing in content, management said original content is more efficient on a dollar per viewing hour basis and proprietary content generates more viewing hours, which drives retention. However, management also disclosed that licensed content increased viewing hours, especially outside the U.S. Even older series such as Friends helped increase viewing hours to 10 billion in the quarter, up from 4 billion two years ago. We continue to believe Netflix will benefit from expanding its library via both original content and global licensing deals.

Neil Macker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.