Netflix Overvalued Despite Stock Slide

Once again, management emphasised investment in proprietary content, which we believe will deliver excess returns on capital. In order to fund its ever-expanding slate, Netflix expects to return to the debt market next year and potentially return on an annual basis. As expected, Netflix’s programming is progressing, from a focus on primarily prestige shows (House of Cards) to a more expansive slate, with the prestige shows surrounded by niche-focused shows. We expect the company to primarily invest in three types of original content: children’s programming, movies, and scripted programs (both dramas and sitcoms). While its content will generally be available worldwide, we expect Netflix to ramp up its production of region-specific original content, especially as the company enters Asia in early 2016 (South Korea, Hong Kong, Taiwan, and Singapore).

The international expansion is still tracking ahead of expectations on the subscriber side, as Netflix now has 24.0 million paid streaming subscribers, up from 14.4 million in third-quarter 2014 and 7.0 million in second-quarter 2013. Management remains steadfast in its belief that the international rollout will be complete by the end of 2016; we believe that the firm will complete its rollout in most markets, but we expect delays in countries with high regulatory barriers, such as China.

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