Higher Subscriber Growth for Netflix, Shares Pricey
We are retaining the firm's narrow moat rating and our fair value estimate.
Netflix (NFLX) started 2018 with strong subscriber growth as the firm beat its guidance once again. While segment contribution came in above our projections, the firm pushed out its content and marketing spend into the second half of the year. As a result, the free cash flow loss for the quarter was only $287 million, an improvement sequentially from the loss of $524 million in the fourth quarter. However, management continues to project free cash flow burn of $3 billion to $4 billion for 2018, up sharply from $2 billion loss in 2017. Despite the beat on subscribers, we are retaining our narrow moat rating and our fair value estimate of $90 as we project that the firm faces increased competition over the next five years, necessitating an ongoing cash burn and limiting the rate of margin expansion.
Netflix reported better-than-expected subscriber growth in both the international (5.46 million net adds versus guidance of 4.90 million) and U.S. segments (1.96 million net adds, versus guidance of 1.45 million). Management persists in attributing its net add outperformance to excitement around original content and the continued adoption of streaming video. Netflix continues to expand its streaming base, ending the quarter with more than 118.90 million global paid subscribers, up from 94.36 million a year ago. Revenue of $3.70 billion came in just ahead of our $3.59 billion estimate with the majority of the beat coming from domestic streaming ($1.82 billion actual versus $1.75 billion estimate). Domestic streaming monthly revenue per paid member came in at $11.25, up 12% year over year and ahead of our $10.85 estimate. For international streaming, revenue of $1.78 billion was slightly above our $1.74 billion estimate as monthly revenue per paid member came in at $9.77, up 21% year over year.
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Neil Macker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.