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Stock Analyst Update

Netflix Badly Misses Subscriber Growth Goal

We are retaining our narrow moat rating and our fair value estimate for the firm.


 Netflix (NFLX) posted much weaker-than-expected subscriber growth in second quarter of 2018 as the firm missed its total streaming add guidance by one million subscribers. We believe the miss induced management to issue conservative third-quarter subguidance that came in below consensus expectations. While segment contribution margin 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 first half was $846 million, an improvement sequentially from the loss of $989 million in the second half of 2017. However, management reiterated its projection for free cash flow burn of $3 billion to $4 billion for 2018. This guidance implies a free cash flow loss of $2.2 to $3.2 billion in the second half which would be larger than the $2 billion burned over all of 2017. 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 curtailing the speed of margin expansion.

Netflix reported worse-than-expected subscriber growth in both the international (4.47 million net adds versus guidance of 5.00 million) and U.S. segments (0.67 million net adds, versus guidance of 1.20 million). Management could not explain the miss and instead pointed out their poor record of projecting net adds over the last two and half years. Netflix continues to expand its streaming base, ending the quarter with more than 124.35 million global paid subscribers, up from 99.04 million a year ago. Revenue of $3.91 billion came in line with our $3.92 billion estimate. Domestic streaming monthly revenue per paid member came in at $11.37, up 13% year over year and ahead of our $11.25 estimate. For international streaming, revenue of $1.92 billion was slightly below our $1.95 billion estimate as monthly revenue per paid member came in at $9.69, up 17% 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.

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