Neil Macker: Netflix ended 2018 on a strong note as international subs beat guidance by a handily amount. The company continues to expand, both in the U.S. and internationally. But, the problem for the company is the cash burden continues with a free cash flow burn of $3 billion in 2018 and a similar level expected in 2019.
In our view, Netflix will face increasing competition over the next 18 months as NBC, Universal, Warner Media, and Disney all launch services. These services will all contain content from these large media firms, forcing Netflix to increase its content spend on original content. As a result of this increased content spend, we expect cash flow burn to remain at elevated levels over the next five years. This increased content spend will also limit margin expansion, both here in the U.S. and internationally.
As a result, we continue to believe that Netflix shares are overvalued. Our new fair value estimate is $135. We believe that investors should stay off the roller coaster that is Netflix for the foreseeable future.